A History of Money
From Ancient Times to the Present Day
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A History of Money
From Ancient Times to the Present Day
GLYN DAVIES
Published in co-operation with
Julian Hodge Bank Limited
UNIVERSITY OF WALES PRESS
CARDIFF
2002
© Glyn Davies, 2002
First edition, 1994
Reprinted, 1995
Second edition, in paperback with revisions and Postcript, 1996
Reprinted, 1997
Third edition, with revisions, 2002
All rights reserved. No part of this book may be reproduced, stored in a
retrieval system, or transmitted, in any form or by any means, electronic,
mechanical, photocopying, recording or otherwise, without clearance from
the University of Wales Press, 10 Columbus Walk, Brigantine Place, Cardiff
CF10 4UP.
www. wales, ac. uk/ press
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
ISBN 0-7083-1773-1 hardback
0-7083-1717-0 paperback
The right of Glyn Davies to be identified as author of this work has been
asserted by him in accordance with the Copyright, Design and Patents Act
1988.
Cover design by Neil James Angove
Cover illustrations: Barclaycard reproduced with permission of Barclays
Bank; tally sticks with permission of the Public Record Office; cowrie shell
and 'owl' of Athens with permission of the Ancient Art & Architecture
Collection; five million mark note with permission of Mary Evans Picture
Library.
Typeset in Wales at the University of Wales Press, Cardiff
Printed and bound in Great Britain by Creative Print and Design, Ebbw Vale
Foreword
From earliest times money in some form or another has been central to
organized living. Increasingly it shapes foreign and economic policies of
all governments. It is synonymous with power and it shapes history in
every generation.
Professor Glyn Davies, Economic Adviser to the Julian Hodge Bank
Ltd, and sometime Chief Economic Adviser to the Secretary of State for
Wales, and then to the Bank of Wales, is an ideal person to write the
history of money itself. In his fifteen years as Sir Julian Hodge Professor
of Banking and Finance at the University of Wales Institute of Science
and Technology, Glyn Davies earned worldwide recognition as one of
the United Kingdom's front line economists. Both the CBI and various
Select Committees of the House of Commons have sought his help.
For over two decades there has been a unique partnership between
Wales's financial wizard, Sir Julian Hodge, and Professor Glyn Davies.
The genius of Sir Julian is matched by his intuitive caution in matters
financial: it is therefore a high tribute to Professor Glyn Davies that for
two decades he has been Sir Julian Hodge's trusted Economic Adviser.
This book is a masterpiece of scholarly research which economists
and bankers will find invaluable. Professor Glyn Davies enjoys a rare
gift in being able to present the most complicated issues in clear and
simple terms.
I declare my personal interest in this book because I have proved the
quality of Professor Glyn's work both when I served as Secretary of
State for Wales and when I was Chairman of the Bank of Wales.
George Tonypandy
The Right Honourable Viscount Tonypandy PC, DCL,
House of Lords,Westminster
lMarcbl994
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To
Sir Julian Hodge LLD
Merchant banker and philanthropist
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Contents
Foreword by George Thomas, The Right Honourable Viscount
Tonypandy v
Dedication vii
Acknowledgements xv
Preface to the third edition xvii
1 THE NATURE AND ORIGINS OF MONEY AND BARTER 1-33
The importance of money 1
Sovereignty of monetary policy 3
Unprecedented inflation of population 5
Barter: as old as the hills 9
Persistence of gift exchange 11
Money: barter's disputed paternity 13
Modern barter and countertrading 18
Modern retail barter 21
Primitive money: definitions and early development 23
Economic origins and functions 27
The quality-to-quantity pendulum: a metatheory of money 29
2 FROM PRIMITIVE AND ANCIENT MONEY TO THE
INVENTION OF COINAGE, 3000-600 bc 34-65
Pre-metallic money 34
The ubiquitous cowrie 36
Fijian whales' teeth and Yap stones 37
Wampum: the favourite American-Indian money 39
Cattle: man's first working-capital asset 42
Pre-coinage metallic money 45
Money and banking in Mesopotamia 48
Girobanking in early Egypt 52
X
CONTENTS
Coin and cash in early China 55
Coinage and the change from primitive to modern economies 58
The invention of coinage in Lydia and Ionian Greece 61
3 THE DEVELOPMENT OF GREEK AND ROMAN
MONEY, 600 bc-ad 400 66-112
The widening circulation of coins 66
Laurion silver and Athenian coinage 68
Greek and metic private bankers 71
The Attic money standard 74
Banking in Delos 78
Macedonian money and hegemony 79
The financial consequences of Alexander the Great 82
Money and the rise of Rome 87
Roman finance, Augustus to Aurelian, 14 BC-AD 275 94
Diocletian and the world's first budget, 284-305 100
Finance from Constantine to the Fall of Rome 106
The nature of Graeco-Roman monetary expansion 109
4 THE PENNY AND THE POUND IN MEDIEVAL
EUROPEAN MONEY, 410-1485 113-75
Early Celtic coinage 113
Money in the Dark Ages: its disappearance and re-emergence 117
The Canterbury, Sutton Hoo and Crondall finds 118
From sceattas and stycas to Offa's silver penny 123
The Vikings and Anglo-Saxon recoinage cycles, 789-978 128
Danegeld and heregeld, 978-1066 131
The Norman Conquest and the Domesday Survey, 1066-1087 134
The pound sterling to 1272 139
Touchstones and trials of the Pyx 144
The Treasury and the tally 147
The Crusades: financial and fiscal effects 153
The Black Death and the Hundred Years War 160
Poll taxes and the Peasants' Revolt 167
Money and credit at the end of the Middle Ages 169
5 THE EXPANSION OF TRADE AND FINANCE,
1485-1640 176-237
What was new in the new era? 176
CONTENTS
XI
Printing: a new alternative to minting 178
The rise and fall of the world's first paper money 181
Bullion's dearth and plenty 184
Potosi and the silver flood 188
Henry VII: fiscal strength and sound money, 1485-1509 190
The dissolution of the monasteries 194
The Great Debasement 198
Recoinage and after: Gresham's Law in Action, 1560-1640 203
The so-called price revolution of 1540-1640 212
Usury: a just price for money 218
Bullionism and the quantity theory of money 223
Banking still foreign to Britain? 233
6 THE BIRTH AND EARLY GROWTH OF BRITISH
BANKING, 1640-1789 238-83
Bank money supply first begins to exceed coinage 238
From the seizure of the mint to its mechanization, 1640-1672 240
From the great recoinage to the death of Newton, 1696-1727 245
The rise of the goldsmith-banker, 1633-1672 248
Tally-money and the Stop of the Exchequer 252
Foundation and early years of the Bank of England 255
The national debt and the South Sea Bubble 263
Financial consequences of the Bubble Act 267
Financial developments in Scotland, 1695-1789 272
The money supply and the constitution 279
7 THE ASCENDANCY OF STERLING, 1789-1914 284-366
Gold versus paper . . . finding a successful compromise 284
Country banking and the industrial revolution to 1826 286
Currency, the bullionists and the inconvertible pound, 1783-1826 293
The Bank of England and the joint-stock banks, 1826-1850 304
The Banking Acts of 1826 306
The Bank Charter Act 1833 309
Currency School versus Banking School 311
The Bank Charter Act of 1844: rules plus discretion 314
Amalgamation, limited liability and the end of unit banking 316
The rise of working-class financial institutions 323
Friendly societies, unions, co-operatives and collecting societies 323
The building societies 327
Xll
CONTENTS
The savings banks: TSB and POSB 333
The discount houses, the money market and the bill on London 340
The merchant banks, the capital market and overseas investment 345
The final triumph of the full gold standard, 1850-1914 355
Gold reserves, tallies and the constitution 365
8 BRITISH MONETARY DEVELOPMENT IN THE
TWENTIETH CENTURY 367-456
Introduction: a century of extremes 367
Financing the First World War, 1914-1918 368
The abortive struggle for a new gold standard, 1918-1931 375
Cheap money in recovery, war and reconstruction, 1931-1951 384
Inflation and the integration of an expanding monetary system,
1951-1990 397
A general perspective on unprecedented inflation, 1934-1990 397
Keynesian 'ratchets' give a permanent lift to inflation 399
Filling the financial gaps 405
Stronger competition and weaker credit control 408
The American-led invasion and the Eurocurrency markets in
London 414
The monetarist experiment, 1973-1990 421
The secondary banking crisis: causes and consequences 421
Supervising the financial system 425
Thatcher and the medium-term financial strategy 431
EMU: the end of the pound sterling? 443
9 AMERICAN MONETARY DEVELOPMENT SINCE 1700 457-548
Introduction: the economic basis of the dollar 457
Colonial money: the swing from dearth to excess, 1700-1775 458
The official dollar and the growth of banking up to the Civil
War, 1775-1861 466
'Continental' debauchery 466
The constitution and the currency 468
The national debt and the bank wars 471
A banking free-for-all, 1833-1861 479
From the Civil War to the founding of the 'Fed', 1861-1913 487
Contrasts in financing the Civil War 487
Establishing the national financial framework 490
Bimetallism's final fling 494
CONTENTS
XI 11
From gold standard to central bank(s), 1900-1913 499
The banks through boom and slump, 1914-1944 504
The 'Fed' finds its feet, 1914-1928 504
Feet of clay, 1928-1933 509
Banking reformed and resilient, 1933-1944 512
Bretton Woods: vision and realization, 1944-1991 517
American banks abroad 525
From accord to deregulation, 1951-1980 530
Hazardous deposit insurance for thrifts, banks . . . and
taxpayers 535
From unit banking ... to balkanized banking 539
Summary and conclusion: from beads to banks without barriers 546
10 ASPECTS OF MONETARY DEVELOPMENT IN EUROPE
AND JAPAN 549-95
Introduction: banking expertise shifts northward 549
The rise of Dutch finance 550
The importance of the Bank of Amsterdam 550
The Dutch tulip mania, 1634-1637 551
Other early public banks 554
France's hesitant banking progress 555
German monetary development: from insignificance to
cornerstone of the EMS 567
The monetary development of Japan since 1868 582
Introduction: the significance of banks in Japanese
development 582
Westernization and adaption, 1868-1918 583
Depression, recovery and disaster, 1918-1948 587
Resurgence and financial supremacy, 1948-1990 590
Stagnation and the limitations of monetary policy, 1990-2002 594
11 THIRD WORLD MONEY AND DEBT IN THE
TWENTIETH CENTURY 596-641
Introduction: Third World poverty in perspective 596
Stages in the drive for financial independence 601
Stage 1: Laissez-faire and the Currency Board System,
c.1880-1931 603
Stage 2: The sterling area and the sterling balances,
1931-1951 607
XIV
CONTENTS
Stage 3: Independence, planning euphoria and banking
mania, 1951-1973 610
Stage 4: Market realism and financial deepening, 1973-1993 616
The Nigerian experience 616
Impact of the Shaw-McKinnon thesis 619
Contrasts in financial deepening 622
Third World debt and development: evolution of the crisis 632
Conclusion: reanchoring the runaway currencies 639
12 GLOBAL MONEY IN HISTORICAL PERSPECTIVE 642-59
Long-term swings in the quality/quantity pendulum 642
The military and developmental money-ratchets 646
Free trade in money in a global, cashless society? 649
Independent multi-state central banking 652
Conclusion: 'Money is coined liberty' 655
13 FURTHER TOWARDS A GLOBAL CURRENCY 660-83
The epoch-making euro 660
More coins in an increasingly cashless society 667
The paradox of coin: rising production - falling significance 669
Speculation and the Tobin Tax 674
The end of inflation? 679
Bibliography 684-702
Index 703-20
A cknowledgements
First and foremost I wish to thank Sir Julian Hodge for his unfailing
support and encouragement. For over a quarter of a century I have been
fortunate in being able to observe at close quarters Sir Julian's genius
for making money - and for making money do good. As an economist I
have particularly enjoyed the opportunities provided by such
experiences to analyse how far abstract theories stand up in
comparison with the practical tests of the market place. My grateful
thanks are also offered to Eric Hammonds, Chairman, and Jonathan
Hodge, Director, Julian Hodge Bank Ltd., and to Venetia Farrell of the
Jane Hodge Foundation.
To the late and sadly missed Viscount Tonypandy I remain greatly
indebted for his typically kind and prompt response in having written
the Foreword in his unique, incisive style.
The academic sources on which I have drawn are widely spread over
time and space and include, for the more recent decades, colleagues and
former students. Only to a small degree can such debts be indicated in
the bibliography. To the many librarians who have made essential
material easily and pleasantly available to me I am glad to record my
thanks, especially to Ken Roberts of the University of Wales Library,
Cardiff, and to my son Roy Davies, of Exeter University Library, whose
mastery of the Web proved invaluable.
The staff of the Royal Mint and scores of practising bankers, building
society executives, accountants and civil servants who have generously
given of their time to discuss matters of financial interest similarly
deserve my gratitude.
XVI
ACKNOWLEDGEMENTS
My warm thanks go to Ned Thomas, former Director of the
University of Wales Press, to his successor, Susan Jenkins, to Richard
Houdmont, Deputy Director, to Liz Powell, Production and Design
Manager, and to all the staff, including especially Ceinwen Jones,
Editorial Manager, who have worked most expeditiously and with
highly commendable skill and zeal on my behalf. Despite such
enthusiastic professional assistance any errors remaining are my own.
Finally, the long-suffering and devoted support of my wife, Anna
Margrethe, is beyond praise.
Preface to the Third Edition
In our technological age too many agree with Henry Ford's blunt
dictum that history is bunk, though he was far from thinking that
money was bunk. This ambivalent attitude remains prevalent today in
the general approach to economic and financial studies, so that whereas
there is a superabundance of books on present-day monetary and
financial problems, politics and theories, it is my contention first that
monetary histories are far too scarce and secondly that those which do
exist tend in the main to be far too narrow in scope or period.
Because of the difficulties of conducting 'experiments' in the
ordinary business of economic life, at the centre of which is money, it is
most fortunate that history not only generously provides us with a
potentially plentiful proxy laboratory, a guidebook of more or less
relevant alternatives, but also enables us to satisfy a natural curiosity
about the key role played by money, one of the oldest and most
widespread of human institutions. Around the next corner there may be
lying in wait apparently quite novel monetary problems which in all
probability bear a basic similarity to those that have already been
tackled with varying degrees of success or failure in other times and
places. Yet despite the antiquity and ubiquity of money its proper
management and control have eluded the rulers of most modern states
partly because they have ignored the wide-ranging lessons of the past or
have taken too blinkered and narrow a view of money.
Economists, and especially monetarists, tend to overestimate the
purely economic, narrow and technical functions of money and have
placed insufficient emphasis on its wider social, institutional and
psychological aspects. However, as is shown in this study, money
XV111
PREFACE
originated very largely from non-economic causes: from tribute as well
as from trade, from blood-money and bride-money as well as from
barter, from ceremonial and religious rites as well as from commerce,
from ostentatious ornamentation as well as from acting as the common
drudge between economic men. Even in modern circumstances money
still yields powerfully important psychic returns (such as an individual's
social rank and standing or a nation's position in the GNP league
table), while the eagerness to save or to spend is a fickle, moody,
contagious, psychological characteristic, not fully captured in the
economist's statistics on velocity of circulation. Thus money, more than
ever in our monetarist era, needs to be widely interpreted to include
discussion not only of currency and banking, but also savings banks,
building societies, hire purchase finance companies and the fiscal
framework on those not infrequent occasions when fiscal policy
conflicts with or complements the operation of monetary policy. In this
regard it is demonstrated that even in medieval and earlier periods these
wider aspects were of considerably greater importance than is
conventionally believed. There are therefore many advantages which
can only be obtained by tracing monetary and financial history with a
broad brush over the whole period of its long and convoluted
development, where primitive and modern moneys have overlapped for
centuries and where the logical and chronological progressions have
rarely followed strictly parallel paths.
Anyone who attempts to cover such a wide range inevitably lays him-
or herself open to criticisms similar to those inescapably faced by map-
makers in attempting to portray the whole or a major part of the globe
on a flat surface. If the directions are right the sizes of the various
countries become grossly disproportional; attempts at equal areas beget
other distortions in shape or direction; while the currently politically
correct Peters projection looks like nothing on earth. Similar criticisms
relate to the selection of historical material from the vast mass currently
available. What some experts would regard as vitally important features
may have been glossed over or omitted, while other aspects which they
might consider trivial have been given undue attention. Selection from
such a vast menu is bound to be arbitrary, depending on the personal
taste of the author. Furthermore any claim to complete neutrality and
unbiased objectivity is similarly bound to be untenable. Every list of
sins of commission or omission would vary, especially among
economists . . . six economists, at least half a dozen opinions.
A further point: where one is dealing with a narrower, more
manageable period or area it is all the more possible (and highly
fashionable) to construct a sophisticated model or theory closely fitting
PREFACE
XIX
the subject under scrutiny. Conversely, only the most loose-fitting (but
none the less useful) garment could possibly cover the variety of models
comprising such a wide range as is examined in this book. One such
simple theory does, however, emerge: the quality-quantity pendulum;
although it must be borne in mind that its repetitional swings become
discernible only where a long period of time is taken into consideration.
The first three chapters look at primitive and ancient money and at
the origins of coined money and its development up to the fall of Rome.
The next two chapters look at the unique disappearance and re-
emergence of coined money in medieval Britain, followed by the great
expansion of trade and finance in Britain and Europe from around 1485
to 1650. We then trace the development of British money and banking
to its dominant position in the gold standard system that eventually
broke down in the period from 1914 to 1931, thereafter analysing the
monetary controversies during the rest of the twentieth century
including the implications of entry into the European Monetary
System. The monetary development of the USA (in chapter 9) provides
a considerable contrast, moving from wampum to world power in less
that two centuries. Only a few of the salient features of money and
banking in parts of continental Europe and Japan are sketched in
chapter 10 but with some emphasis being given to the closer
relationships seen in those countries between financial and industrial
companies and the consequences that this might have for a faster rate of
economic growth than has occurred elsewhere. Chapter 11 deals with
pre- and post-colonial monetary systems, the rise of indigenous
banking in the Third World and the vast problems of international
indebtedness. Chapters 12 and 13 summarize progress towards a
possible universal free market in money, including dollarization, the
revolutionary advance of the euro and the controversial Tobin Tax.
Henry Ford, the father of mass production, unconsciously gave the
world a powerful push towards the goal of global finance where
eventually the colour of everyone's money will be the same. Fortunately,
that blissful day has not quite yet dawned.
1 June 2002
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1
The Nature and Origins of Money
and Barter
The importance of money
Perhaps the most common claim with regard to the importance of
money in our everyday life is the morally neutral if comically
exaggerated claim that 'money makes the world go round'. Equally
exaggerated but showing a deeper insight is the biblical warning that
'the love of money is the root of all evil', neatly transformed by George
Bernard Shaw into the fear that it is rather the lack of money which is
the root of all evil. However, whether it is the love or conversely the lack
of money which is potentially sinful, the purpose of the statement in
either case is to underline the overwhelming personal and moral
significance of money to society in a way that gives a broader and
deeper insight into its importance than simply stressing its basically
economic aspects, as when we say that 'money makes the world go
round'. Consequently whether we are speaking of money in simple, so-
called primitive communities or in much more advanced, complex and
sophisticated societies, it is not enough merely to examine the narrow
economic aspects of money in order to grasp its true meaning. To
analyse the significance of money it must be broadly studied in the
context of the particular society concerned. It is a matter for the heart
as well as for the head: feelings are reasons, too.
Money has always been associated in varying degrees of closeness
with religion, partly interpreted in modern times as the psychology of
habits and attitudes, hopes, fears and expectations. Thus the taboos
which circumscribe spending in primitive societies are basically not
unlike the stock market bears which similarly reduce expenditures
through changing subjective assessments of values and incomes, so that
2
THE NATURE AND ORIGINS OF MONEY AND BARTER
the true interpretation of what money means to people requires the
sympathetic understanding of the less obvious motivations as much as,
if not more than, the narrow abstract calculations of the computer. To
concentrate attention narrowly on 'the pound in your pocket' is to
devalue the all-pervading significance of money.
Personal attitudes to money vary from the disdain of a small
minority to the total preoccupation of a similarly small minority at the
other extreme. The first group paradoxically includes a few of the very
rich and of the very poor. Sectors of both are unconsciously united in
belittling its significance: the rich man either because he delegates such
mundane matters to his servants or because the fruits of compound
interest exceed his appetite, however large; the poor man because he
makes a virtue out of his dire necessity and learns to live as best he can
with the very little money that comes his way, so that his practical
realism makes his enforced self-denial appear almost saintly. He limits
his ambition to his purse, present and future, so that his accepted way
of life limits his demand for money rather than, as with most of us, the
other way round. At the other extreme, preoccupation with money
becomes an end in itself rather than the means of achieving other goals
in life.
Virtue and poverty, however, are not necessarily any more closely
related than are riches and immorality. Thus Boswell quotes Samuel
Johnson:
When I was a very poor fellow I was a great arguer for the advantages of
poverty . . . but in a civilised society personal merit will not serve you so
much as money will. Sir, you may make the experiment. Go into the street,
and give one man a lecture on morality, and another a shilling, and see
which will respect you most . . . Ceteris paribus, he who is rich in a civilised
society, must be happier than he who is poor. (Boswell 1791, 52-3)
Johnson's commonsense approach to the human significance of money
not only rings as true today as it did two centuries ago, but may be
mirrored in the statements and actions of much earlier civilizations.
The minority who find it possible to exhibit a Spartan disdain for
money has always been exceptionally small and in modern times has
declined to negligible proportions, since the very few people concerned
are surrounded by the vast majority for whom money plays a role of
growing importance. Even those who as individuals might choose to
belittle money find themselves constrained at the very least to take into
account the habits, views and attitudes of everyone else. In short, no
free man can afford the luxury of ignoring money, a universal fact
which explains why Spartan arrogance was achieved at the cost of an
THE NATURE AND ORIGINS OF MONEY AND BARTER
3
iron discipline that contrasted with the freedom of citizens of other
states more liberal with money. This underlying principle of freedom of
choice which is conferred on those with money became explicitly part
of the strong foundations of classical economic theory in the nineteenth
century, expounded most clearly in the works of Alfred Marshall, as
'the sovereignty of the consumer', a concept which despite all the
qualifications which modify it today, nevertheless still exerts its
considerable force through the mechanism of money.
Sovereignty of monetary policy
This essential linkage between money, free consumer choice and
political liberty is the central and powerful theme of Milton Friedman's
brand of monetarism consistently proclaimed for at least two decades,
from his Capitalism and Freedom (1962) to what he has called his
'personal statement', Free to Choose, published in 1980. An even longer
crusade championing the essential liberalism of money-based allocative
systems was waged by Friedrich Hayek, from his Road to Serfdom in
1944 to his Economic Freedom of 1991.
Yet for a generation before Friedman, the eminent Cambridge
economist Joan Robinson called into question the conventional basis of
consumer sovereignty in her pioneering work on Imperfect Competition
(1933). Indeed she doubted 'the validity of the whole supply-and-
demand-curve analysis' (p.327). Many years later, with perhaps too
humble and pessimistic an assessment of the tremendous influence of
her writing, she felt forced to lament: All this had no effect. Perfect
competition, supply and demand, consumer's sovereignty and marginal
products still reign supreme in orthodox teaching. Let us hope that a
new generation of students, after forty years, will find in this book what
I intended to mean by it' (1963, xi).
By the mid-1970s it became obvious that, as in the inter-war period,
the fundamental beliefs of economic theory were again being
challenged, and nowhere was this probing deeper or more urgent than
with regard to monetary economics. Mass unemployment had pushed
Keynes towards a general theory which, when widely accepted, helped
to bring full employment, surely the richest reward that can ever be laid
to the credit (if admittedly only in part) of the economist's theorizing.
But persistent inflation posed questions which Keynesians failed to
answer satisfactorily, while the return of mass unemployment combined
with still higher inflation finally destroyed the Keynesian consensus,
and allowed the monetarists to capture the minds of our political
masters.
4
THE NATURE AND ORIGINS OF MONEY AND BARTER
Nevertheless, Joan Robinson's view is quite true in that the
modifications of classical value theory (now being painfully and
patchily refurbished by the New Classical School) were as nothing
compared with the surging revolutions in monetary theories which have
occurred since the 1930s, mainly taking the form of a forty years' war
between Keynesians and monetarists, until the latter ultimately
achieved control over practical policies in much of the western world by
the end of the 1970s, despite the continuing strong dissent of the now
conventional Keynesian economists. Whereas the man in the street
knows nothing of the economics of imperfect competition or the theory
of contestable markets, he feels himself equipped and more than willing
to take sides in the great monetarist debates of the day. Without being
dogmatic about this, it is unlikely that in any previous age monetary
affairs and monetary theories have ever captured so vast an army of
debaters, professional and amateur, as exists in today's perplexing
world of uncertainty, inflation, unemployment, stagnation and
recession. Can the control of money, one wonders, be the sovereign
remedy for all these ills?
Never before has monetary policy openly and avowedly occupied so
central a role in government policy as from the 1980s with the
'Thatcherite experiment' in Britain and the 'Reaganomics' of the
United States. Needless to say, if monetary policy finally reigns supreme
in the two countries of the world which have together dominated
economic theory and international trade and finance over the last two
centuries this fact is bound to have an enormous influence on current
financial thought and practice throughout the world. If money is now
of such preponderant importance in the North it cannot fail also to
exert its powerful sway over the dependent economies and
'independent' central banks of the developing countries of the South.
This tendency is of course strongly reinforced by the growing burden of
sovereign debt, i.e. debts mainly owed or guaranteed by governments
and government agencies in countries like Mexico, Brazil, Argentina,
Poland, Romania, Nigeria, India and South Korea, and to private and
public banks and agencies in the West. The unprecedented scale of this
long-term debt, coupled with the vast short-term flows of petro-dollars
and Euro-currencies, is in part reflection and in part cause of the
worldwide inflationary pressures, again of unprecedented degree, which
have raised public concern about the subject of money to its present
pinnacle. There are far more people using much more money,
interdependently involved in a greater complex of debts and credits
than ever before in human history. However, despite man's growing
mastery of science and technology, he has so far been unable to master
THE NATURE AND ORIGINS OF MONEY AND BARTER
5
money, at any rate with any acceptable degree of success, and to the
extent that he has succeeded, the irrecoverable costs in terms of mass
unemployment and lost output would seem to outweigh the benefits.
If money were merely a tangible technical device so that its supply
could be closely defined and clearly delimited, then the problem of how
to master and control it would easily be amenable to man's highly
developed technical ingenuity. In the same way, if inflation had simply a
single cause — government — and money supply came simply from the
same single source, then mechanistic controls might well work.
However, although government is powerful on both sides of the
equation it is only one among many complex factors. Among these
neglected factors, according to H. C. Lindgren, in a rare book on the
psychology of money, 'the psychological factor that continually eludes
the analysts and planners is the mood of the public' (1980, 54).
Furthermore, technology in solving technical problems often creates
yet more intractable social and psychological problems, which is why,
according to Dr Bronowski, 'there has been a deep change in the temper
of science in the last twenty years: the focus of attention has shifted
from the physical to the life sciences' and 'as a result science is drawn
more and more to the study of individuality' (Bronowski 1973). It is
ironic that just when physical scientists are seeing the value of a more
humanistic approach, economics, and particularly monetary
economics, has become less so by attempting to become more
'scientific', mechanistic and measurable.
Unprecedented inflation of population
There is an additional factor, 'real' as opposed to 'financial', which
helps to explain the sustained strength of worldwide inflationary forces
and yet remains unmentioned in most modern works on money and
inflation, viz. the pressure of a rapidly expanding world population on
finite resources — virtually a silent explosion so far as monetarist
literature is concerned. Thus nowhere in Friedman's powerful, popular
and influential book Free to Choose is there even any mention of the
population problem, nor the slightest hint that the inflation on which
he is acknowledged to be the world's greatest expert might in any way
be caused by the rapidly rising potential and real demands of the
thousands of millions born into the world since he began his researches.
Further treatment of these matters must await their appropriate place in
later chapters, but since the size and distribution of this tremendous
growth of population is crucial to an understanding of why the study of
money is currently of unprecedented importance, a few introductory
6
THE NATURE AND ORIGINS OF MONEY AND BARTER
comments appear to be essential. One neglected reason why monetary
policy may appear to be so attractively powerful in the richer North and
West is precisely because there population pressures are least. In
contrast, whereas monetary policy is of special importance in the poor
developing countries of the South and East, its scope and powers are
considerably reduced because this is where population pressures are
greatest. Too many people are chasing too few goods.
The currently fashionable monetarist explanations of inflation fail,
then, to take into account the rapid rise in real pressure on resources
stemming from the population explosion. This forces communities to
react by creating, by means of various devices easily learned from the
West, the moneys required to help to accommodate such pressures. The
enormous size of these increases since 1945 is such that millions of
relatively rich have added their effective demand to the frustrated
potential demands of the thousands of millions more who have
remained abysmally poor. The trend of demand increases year by year
causing relatively greater scarcities of primary resources and also of
manufactured goods and services such as consumer durables, health
care and education. The vastly increased competition for such goods
and services helps to give an upward twist to the inflationary spiral
despite the periodic changes in the terms of trade for certain primary
products. World population has ultimately increased, in some ways as
Malthus predicted over two hundred years ago, at a pace exceeding
productivity, since productivity is at or near its lowest in those areas
where population growth is at or near its greatest.
It took man a million years or so, until about 1825, to reach a total
population of 1,000 million, but only about one hundred years to add
another 1,000 million and only some fifty years, from 1925 to 1975 to
double that total to 4,000 million, by which time the population was
already increasing by 75 million annually. In the generation from 1975
to the year 2000, according to a consensus of opinion among experts in
Britain, USA and the United Nations Organization, world population
will increase by 55 per cent or 2,261 million to a total of 6,351 million
and will then be increasing by around 100 million annually, so that, if
currently projected growth rates continue, world population may reach
10,000 million by around the year 2030, well within the life expectancy
of persons now reaching adult years in the western world.1
The whole world has now broken the link with commodity money
which once acted as a brake on inflation. The less developed countries
are even less able than the industrialized countries to avoid the
1 For a powerfully presented and more optimistic view see B. Lomborg, The Skeptical
Environmentalist (Cambridge, 2001).
THE NATURE AND ORIGINS OF MONEY AND BARTER
7
mismanagement of money, so that in their attempts to create monetary
claims, including borrowing, to compete for resources which are
tending to grow ever scarcer relatively to demand, runaway inflation
with rates of up to 100 per cent or more per annum are not uncommon.
Added to these unprecedented monetary problems over 90 per cent of
the projected increase in population to the end of the century will take
place in these poor and less developed countries, which by their very
nature find it more difficult than their richer, industrialized neighbours
to stem the full tide of inflation. Intensifying this trend is the increasing
urbanization of previously predominantly rural communities, with the
greater emphasis on money incomes that is the inevitable concomitant
of such migration. A few telling examples must suffice, taking the
population in 1960 and the projections for the year 2000 in parenthesis
based on UN estimates and medium projections: Calcutta 5.5 m (19.7
m); Mexico City 4.9 m (31.6 m); Bombay 4.1 m (19.1 m); Cairo 3.7 m
(16.4 m); Jakarta 2.7 m (16.9 m); Seoul 2.4 m (18.7 m); Delhi 2.3 m
(13.2 m); Manila 2.2 m (12.7 m); Tehran 1.9 m (13.8 m), and Karachi
1.8 m (15.9 m). These ten towns alone will increase from a total of 31.5
m to 178 m. {Global 2000 1982, 242). This gives a new twist to William
Cowper's claim: 'God made the country and man made the town.'2
The young age composition of such vastly expanding populations
increases mobility, the acceptance of change and the political pressures
for change, including the desire to have at least some share in the rising
standards of living of the richer countries, of which, through rapidly
improved communications, they are becoming increasingly conscious.
This international extension of the 'Duesenberry effect' (Duesenberry
1967), viz. that the patterns of consumption of the next highest social
class are deemed most desirable, again helps to create increased
expenditure pressures throughout the developing world and particularly
in those populous pockets of relatively rich areas which exist almost
cheek by jowl among the urban poor. Duesenberry also makes the
important point that 'the larger the rate of growth of population the
larger the average propensity to consume' (Duesenberry 1958, 265).
Confronted with the magnitude of the problem of world poverty,
western man may feel uncomfortable, individually helpless and
perplexed by the merits of 'aid versus trade'. There is an imbalance in
awareness as between North and South, and whereas it would be a
caricature to say 'They ask for bread, and we give them . . . Dallas',
nevertheless the three-quarters of the world's people in the hungry
2 According to the UN survey The World Population, 2001, 2.8 billion already lived in
cities, rising to 3.9 billion by 2015, with 23 cities exceeding 10 million, including five
exceeding 20 million each.
8
THE NATURE AND ORIGINS OF MONEY AND BARTER
south are increasingly aware of how the other quarter lives. This
caricature is not unlike Picasso's definition of art as a 'lie which helps us
to see the truth'. Be that as it may, the expenditure patterns of society
throughout the world are becoming westernized, breaking down
indigenous social patterns and so leading to modern habits which,
unfortunately, tend to encourage inflationary monetary systems. Thus,
the worldwide expansion of money has been partly caused by, but has
far exceeded, the vast expansion of population.
Although the question of whether the world is approaching the limits
of growth may cause a growing number of fortunate men in modern
affluent societies to cast doubt on the need for greater economic
growth, nevertheless there is no question that economic growth affords
the only means whereby approximately half the world's population - its
women - can escape from the daily drudgery that has brutalized life for
millions throughout time. The appalling persistence of poverty and
what it means for families and especially mothers is brought out
(insofar as these matters can ever meaningly be described in words) by
the Brandt Report in 1980 which gives the estimate of the United
Nations Children's Fund that in 1978 more than twelve million children
under five years of age died of hunger (Brandt 1980, 16). UNICEF's
estimate for 1979, the 'Year of the Child', rose to seventeen million. It
may be an eminently debatable point as to whether man without money
is like Hobbes's famous picture of man without government: 'No arts;
no letters; no society; and which is worst of all, continual fear and
danger of violent death; and the life of man, solitary, poor, nasty,
brutish, and short' (Hobbes 1651, chapter 13). However, there can be no
such doubt as to the direct ameliorative influence of economic growth
on the standard of living of the female half of the human race, growing
numbers of whom, at long last, are beginning to enjoy a diffusion of
welfare that helps to raise, patchily and hesitatingly, the quality of
family life over a large part of the world, and a welcome fall in the
average family size.
Increasingly wealth, i.e. additions to capital stock, mostly takes place
through a rise in incomes and expenditures, which necessarily leads to
an increased use of money. Therefore an increasing proportion as well
as an increasing amount of trading in the rapidly growing less
developed countries of the world is now based on abstract
developments of money, and far less than formerly on barter and more
primitive forms of money. Thus the individual finds release from
irksome restraint and is able to exercise greater freedom of choice as a
necessary corollary of the monetization of the economies of the less
developed countries. In the aggregate, however, hundreds of millions of
THE NATURE AND ORIGINS OF MONEY AND BARTER
9
people, though still poor, have moved out of what were still largely
subsistence economies into market economies where money naturally
plays a bigger role. The speed of political, social, economic and
financial change (partly but by no means entirely because of
technological development) is telescoping what were previously secular
trends in the West into mere decades. This is particularly so with regard
to the dramatic change from primitive to modern money. Before turning
to look at barter and what is still for us today the important but
generally neglected subject of primitive moneys we may therefore
conclude our preliminary assessment of the importance of modern
money by stating that there are good reasons for believing that money
means much more today to many more people throughout the world
than it has ever meant before in human history.
Barter: as old as the hills
The history of barter is as old, indeed in some respects very much older,
than the recorded history of man himself. The direct exchange of
services and resources for mutual advantage is intrinsic to the symbiotic
relationships between plants, insects and animals, so that it should not
be surprising that barter in some form or other is as old as man himself.
What at first sight is perhaps more surprising is that such a primeval
form of direct exchange should persist right up to the present day and
still show itself vigorously, if exceptionally, in so many guises
particularly in large-scale international deals between the eastern bloc
and the West. However, barter is crudely robust and adaptable,
characteristics which help to explain both its longevity and its ubiquity.
Thus when the inherent advantages of barter in certain circumstances
are carefully considered, then its coexistence with more advanced and
convenient forms of exchange is more easily appreciated and should
occasion no surprise. Foremost among these advantages is the concrete
reality of such exchanges: no one parts with value in return for mere
paper or token promises, but rather only in due return for worthwhile
goods or services. In an inflationary age where international indexing
and the legal enforcement of contracts are either in their infancy or of
very shaky construction, this primary advantage of barter may more
than compensate for its cumbersome awkwardness.
Throughout by far the greater part of man's development, barter
necessarily constituted the sole means of exchanging goods and
services. It follows from this that the historical development of money
and finance from relatively ancient times onwards - the substance of
our study - overlaps only to a small degree the study of barter as a
10
THE NATURE AND ORIGINS OF MONEY AND BARTER
whole. Consequently we know more about barter's complementary
coexistence with money than we do about barter in those long, dark,
moneyless ages of prehistory, and thus we tend to derive our knowledge
of barter from the remaining shrinking moneyless communities of more
modern times. It is principally from these latter backward communities
rather than from the mainstream of human progress that most accounts
of barter have been taken to provide the basic examples typically
occurring in modern textbooks on money. Little wonder then that these
have tended not only to overstress the disadvantages of barter but have
also tended to base the rise of money on the misleadingly narrow and
mistaken view of the alleged disadvantages of barter to the exclusion of
other factors, most of which were of very much greater importance than
the alleged shortcomings of barter. Barter has, undeservedly, been given
a bad name in conventional economic writing, and its alleged crudities
have been much exaggerated.
As the extent and complexity of trade increased so the various
systems of barter naturally grew to accommodate these increasing
demands, until the demands of trade exceeded the scope of barter,
however improved or complex. One of the more important
improvements over the simplest forms of early barter was first the
tendency to select one or two particular items in preference to others so
that the preferred barter items became partly accepted because of their
qualities in acting as media of exchange although, of course, they still
could be used for their primary purposes of directly satisfying the wants
of the traders concerned. Commodities were chosen as preferred barter
items for a number of reasons - some because they were conveniently
and easily stored, some because they had high value densities and were
easily portable, some because they were more durable (or less
perishable). The more of these qualities the preferred item showed, the
higher the degree of preference in exchange. Perhaps the most valuable
step forward in the barter system was made when established markets
were set up at convenient locations. Very often such markets had been
established long before the advent of money but were, of course,
strengthened and confirmed as money came into greater use - money
which in many cases had long come into existence for reasons other
than trading. In process of time money was seen to offer considerable
advantages over barter and very gradually took over a larger and larger
role while the use of barter correspondingly diminished until eventually
barter simply re-emerged in special circumstances, usually when the
money system, which was less robust than barter, broke down. Such
circumstances continue to show themselves from time to time and
persist to this day. In some few instances communities appear to have
THE NATURE AND ORIGINS OF MONEY AND BARTER
11
gone straight from barter to modern money. However, in most instances
the logical sequence (barter, barter plus primitive money, primitive
money, primitive plus modern money, then modern money almost
exclusively) has also been the actual path followed, but with occasional
reversions to previous systems.3
Persistence of gift exchange
One of the more interesting forms of early barter was gift exchange,
which within the family partook more of gift than exchange but beyond
that, as for example between different tribes was much more in the
nature of exchange than of gift. Silent or dumb barter took place where
direct and possibly dangerous contact was deliberately avoided by the
participants. An amount of a particular commodity would be left in a
convenient spot frequented by the other party to the exchange, who
would take the goods proffered and leave what they considered a fair
equivalent in exchange. If, however, after obvious examination, these
were not considered sufficient they would remain untaken until the
amount originally offered had been increased. In this way the barter
system, despite being silent was nevertheless an effective and
competitive form of hard bargaining.
Competitive gift exchange probably reached its most aggressive
heights in the ritualized barter ceremonies among North American
Indians, whence it is generally known from the Chinook name for the
practice, as 'potlatch'. This was far more than merely commercial
exchange but was a complex mixture of a wide range of both public and
private gatherings, the latter involving initiation into tribal secret
societies and the former partaking of a number of cultural activities in
which public speaking, drama and elaborate dances were essential
features. The potlatch was a sort of masonic rite, eisteddfod, Highland
games, religious gathering, dance festival and market fair all rolled into
one. The cultural and the commercial interchanges were part of an
integrated whole. However it is clear that one of the main purposes of
these exchange ceremonies was to validate the social ranking of the
leading participants. A person's prestige depended largely on his power
to influence others through the impressive size of the gifts offered, and,
since the debts carried interest, the 'giver' rose in the eyes of the
community to be an envied creditor, indeed a person of considerable
standing. So much time and energy, so much rivalry and envy, coupled
3 'The advent of personal computers has reduced some of the basic problems
associated with barter, i.e. double coincidences of wants and dissemination of
information', A. Marvash and D. J. Smyth, Economic Letters 64, 1999, p. 74.
12
THE NATURE AND ORIGINS OF MONEY AND BARTER
with a certain amount of understandable drunkenness and, for reasons
about to be explained, of wasteful and deliberate destruction also,
accompanied these proceedings that the Canadian federal government
was eventually forced to ban the custom. It did this first by the Indian
Act of 1876, but its ineffectiveness led to further amendments and a
comprehensive new enactment some fifty-one years later. Although the
potlatch system was fairly widespread over North America and varied
from tribe to tribe, the experiences of the Kwakiutl Indians of the
coastal regions of British Columbia may be taken as typical. A taped
autobiography of James Sewid, chief councillor of the largest Kwakiutl
village in the 1970s, contains vivid first-hand descriptions of potlatch
ceremonies during the period of their final flourishes (Spradley 1972).
According to Sewid, awareness of rank dominated his tribal society, and
the major institution for assuming, maintaining and increasing social
status was the potlatch, of which there were local, regional and tribal
varieties in ascending order. After much feasting and many speeches the
public donations were ostentatiously distributed. A person would fail
to attain any social standing without a really lavish distribution, and in
the extreme cases chiefs would demonstrate their wealth and prestige by
publicly destroying some of their possessions so as to demonstrate that
they had more than they needed. Increasing trade with European
immigrants in the 1920s at first considerably raised the material
standards of the Kwakiutl and increased the number and wanton waste
of the potlatches, so much so that the federal government felt compelled
to react strongly.
The Revised Statutes of Canada 1927, clause 140, stipulated that
'Every Indian or other person who engages in any Indian festival, dance
or other ceremony of which the giving away or paying or giving back of
money, goods or articles of any sort forms a part ... is guilty of an
offence and is liable on summary conviction to imprisonment for a term
not exceeding six months and not less than two months.' Sewid himself,
as a boy, saw his relatives sent to prison for participating in the
proscribed potlatches. In Sewid's experience, these potlatch ceremonies
would last for several days, and the competitive presents would include
not only such traditional items as clothing, blankets, furs and canoes,
but also copper shields and such twentieth-century luxuries as sewing
machines, pedal and motor cycles and motor boats. After reaching their
high point in the mid-1920s the age-old potlatch ceremonials gradually
died away — the combined result of the new legislation, its stronger
enforcement and, probably of still greater influence, the cultural
penetration of Indian villages by teachers and entrepreneurs. It is rather
ironic that by the time the clauses of the 1927 Act prohibiting potlatches
THE NATURE AND ORIGINS OF MONEY AND BARTER
13
were finally repealed in 1951, these age-old ceremonies were already on
their last legs and to all intents and purposes ceased to exist by the end
of the 1960s. Modern money and European cultures had however taken
nearly three centuries to conquer this form of tribal barter in North
America.
Having persisted for many hundreds of years this elaborate system of
barter, more social than economic, at first easily absorbed the various
kinds of money brought in by the European conquerors, but after a
final flourish in the inter-war period, rather suddenly slumped.
Unfortunately, in trying to suppress the less desirable aspects of the
potlatch, its good features were also weakened. The replacement of one
kind of exchange by another, or of one kind of money by another, often
has severe and unforeseen social consequences. In the case of a number
of Indian tribes the conflict of culture was particularly harsh and the
ending of the potlatch removed some of the most powerful work
incentives from the younger section of the communities.
One cannot leave the subject of competitive gift exchange without a
brief reference to the most celebrated of all such encounters, namely
that between the Queen of Sheba and Solomon in or about the year 950
BC. Extravagant ostentation, the attempt to outdo each other in the
splendour of the exchanges, and above all, the obligations of reciprocity
were just as typical in this celebrated encounter, though at a fittingly
princely level, as with the more mundane types of barter in other parts
of the world. The social and political overtones were just as inseparably
integral parts of the process of commercial exchanges in the case of the
Queen of Sheba as with the Kwakiutl Indians, even though it would be
harder to imagine a greater contrast in cultures.
Money: barter's disputed paternity
One of the most influential writers on money in the second half of the
nineteenth century was William Stanley Jevons (1835-82). His
theoretical approach was enriched by five years' practical experience as
assayer in the Sydney Mint in Australia at a time when money for most
people meant coins above all else. He begins his book on Money and
the Mechanism of Exchange (1875) by giving two illustrations of the
drawbacks of barter, and it was largely his great influence which helped
to condition conventional economic thought for a century regarding the
inconvenience of barter. He first relates how Mile Zelie, a French opera
singer, in the course of a world tour gave a concert in the Society Islands
and for her fee received one-third of the proceeds. Her share consisted
of three pigs, twenty-three turkeys, forty-four chickens, five thousand
14
THE NATURE AND ORIGINS OF MONEY AND BARTER
coconuts and considerable quantities of bananas, lemons and oranges.
Unfortunately the opera singer could consume only a small part of this
total and (instead of declaring the public feast which she might well
have done had she been versed in local custom) found it necessary
before she left to feed the pigs and poultry with the fruit. Thus a
handsome fee which was equivalent to some four thousand pre-1870
francs was wastefully squandered. Jevons's second account concerns the
famous naturalist A. R. Wallace who, when on his expeditions in the
Malay Archipelago between 1854 and 1862 (during which he originated
his celebrated theory of natural selection) though generally surfeited
with food, found that in some of the islands where there was no
currency mealtimes were preceded by long periods of hard bargaining,
and if the commodities bartered by Wallace were not wanted then he
and his party simply had to go without their dinner. Jevons's readers,
after having vicariously suffered the absurd frustrations of Mile Zelie
and Dr Wallace, were more than willing to accept uncritically, as have
generations of economists and their students subsequently, the
devastating criticisms which Jevons made of barter, without making
sufficient allowance for the fact that those particular barter systems,
however well suited for the indigenous uses of that particular society,
had not been developed to conduct international trade between the
Theatre Lyrique in Paris and the Society Islanders, nor was it designed
to further the no doubt interesting theories of explorers like Wallace.
Obviously, whilst one should not take such inappropriate examples as
in any way typical, nevertheless they show up in a glaringly strong light,
as Jevons intended - even if in an exaggerated and unfair manner - the
disadvantages appertaining to barter.
By far the most authoritative writer on barter and primitive moneys
in the twentieth century was Dr Paul Einzig, to whose stimulating and
comprehensive account of Primitive Money in its Ethnological,
Historical and Economic Aspects (1966) this writer is greatly indebted,
as should be all those who write on these fascinating subjects.
Unfortunately most writers on money seem studiously to have avoided
Einzig's most valuable and almost unique contribution, possibly
because his lucid, readable style belies the quality, erudition and
creativity of his work, and possibly also because his sharp attacks on
conventional economists' treatment of barter were driven home with
unerring aim. As he demonstrates:
There is an essential difference between the negative approach used by
many generations of economists who attributed the origin of money to the
intolerable inconvenience of barter that forced the community to adopt a
reform, and the positive approach suggested here, according to which the
THE NATURE AND ORIGINS OF MONEY AND BARTER
15
method of exchange was improved upon before the old method became
intolerable and before an impelling need for the reforms had arisen . . . The
picture drawn by economists about the inconvenience of barter in primitive
communities is grossly exaggerated. It would seem that the assumption that
money necessarily arose from the realisation of the inconveniences of
barter, popular as it is among economists, needs careful re-examination.
(Einzig, 1966, 346, 353)
One must not of course overplay the adaptability of barter, otherwise
money would never have so largely supplanted it. The most obvious and
important drawback of barter is that concerned with the absence of a
generalized or common standard of values, i.e. the price systems
available with money. Problems of accounting multiply enormously as
wealth and the varieties of exchangeable goods increase, so that
whereas the accounting problems in simple societies may be
surmountable, the foundations of modern society would crumble
without money. Admittedly the emergence of a few preferred barter
items as steps towards more generalized common measures of value
managed to extend the life of barter systems, but by the nature of the
accountancy problem, barter on a large scale became computationally
impossible once a quite moderate standard of living had been achieved
and, despite the growing importance of barter in special circumstances
in the last four or five decades, modern societies could not exist without
monetary systems. A second inherent disadvantage of barter is that
stemming from its very directness, namely the double coincidence of
wants required to complete an exchange of goods or services. In pure
barter if the owner of an orchard, having a surplus of apples, required
boots he would need to find not simply a cobbler but a cobbler who
wanted to purchase apples; and even then there remained the problem
of determining the 'rate of exchange' as between apples and boots. In
the same way for each transaction involving other exchanges, separate
and not immediately discernible exchange rates would have to be
negotiated for every pair of transactions.
In very simple societies exchanging just a few commodities the
absence of a common standard of values is no great problem. Thus
trading in three commodities gives rise at any one time to only three
exchange rates and four commodities to six possible rates. But five
commodities require ten exchange rates, six require fifteen and ten
require forty-five. Obviously the drawbacks of barter quickly become
exposed with any increase in the number and variety of commodities
being traded. As the numbers of commodities increase the numbers of
combinations become astronomical. With a hundred commodities
nearly 5,000 separate exchange rates (actually 4,950) would be
16
THE NATURE AND ORIGINS OF MONEY AND BARTER
necessary in a theoretical barter system, while nearly half a million
(actually 499,500) would be required to support bilateral trading for
1,000 commodities.4 Consequently, despite the undoubted 'revival' of
bartering in recent years this must remain very much an exception to
the rule of money as the basis of trade. Even in final consumption there
are many thousands of different goods purchased daily, as any glance at
the serried ranks of supermarket shelves will immediately convey - but
these represent only the final stage in the complex network of
intermediate wholesale dealing and the multiple earlier processes in the
productive chain. Retail trade, massive as it is in modern societies, is
simply the tip of the iceberg of essentially money-based exchanges: a
perusal of trade catalogues should convince any doubter.
What money has done for the exchange of commodities, the
computer promises to do at least partially for information retrieval and
the exchange of ideas - and not before time. To give but one example
from a relatively narrow and specialized field of human knowledge,
Chemical Abstracts for the year 1982 gives 457,789 references. Perhaps
nothing provides a more enlightening snapshot of the essence of money
than the ability it gives us to compare at a glance the relative values of
any of the hundreds of thousands of goods and services in which we as
individuals, families or larger groups may be interested, and to do so at
minimal costs. Of course there are still very many national varieties of
money where prices are less certain, more volatile, where bilateral
restrictions are not uncommon and where the costs of exchange are far
from being negligible. The Financial Times publishes every week tables
giving the world value of the pound and of the dollar, listing over 200
different national currencies. If these were each of equal importance
then foreign exchange would involve arbitrage between some 20,000
different combinations. Luckily, as with 'preferred barter items', a few
leading currencies, notably sterling throughout the nineteenth and early
twentieth century, plus the American dollar and more recently the
German mark, the euro and the Japanese yen, have provided the basis
of a common measure of international monetary values. Every time a
preferred commodity or a leading currency acts as a focus for a cluster
of other commodities or currencies, so the progressive principle of the
law of combinations works in reverse and thus greatly reduces the
possible number of combinations. Internally money reduces all these to
a single common standard, just as would the single world money
system that reformers have dreamed about for generations in the past -
4 The formula for the number of combinations is C", — n!/[(n— r)!r!] where n is the
number of commodities and r = bilateral groups of 2.
THE NATURE AND ORIGINS OF MONEY AND BARTER
17
and probably for generations to come also. Even so, the world's major
banks have been forced to install the most modern electronic
computational and communications equipment to handle their foreign
exchanges: a costly and speculative, but essential and generally quite
profitable business.
Traditional condemnation of the time-wasting 'higgling of the
market' (to use Alfred Marshall's phrase) which was inevitably
associated with much African and Asian barter, even up to the middle
of the present century, might well indicate a lack of awareness among
critics of the fact that the enjoyable, enthusiastic and argumentative
process of prolonged bargaining was very much the prime object of the
exercise - the actual exchange being something of an anticlimax,
essential but not nearly as enjoyable as the preliminaries. What the
European saw as waste the African saw as a pleasant social custom.
However, given the spread of western modes of life the wasteful aspects
of barter become more insupportable and unnecessarily curtail not
only the size and efficiency of markets but also act as a brake on raising
the living standards of the communities concerned. Specialization, as
Adam Smith rightly emphasized, is limited by the extent of the market,
and so is the mass production upon which the enviable standards of
living of modern communities depend. However, the size of the market
is itself crucially dependent upon the parallel development of money.
Thus just as continued reliance on barter would have condemned
mankind to eternal poverty, so today our lack of mastery of money is in
large part the cause of widespread relative poverty and mass
unemployment, while the enormous waste of potential output forgone
is lost for ever.
Among other disadvantages of barter are the costs of storing value
when these are all of necessity concrete objects rather than, for
example, an abstract bank deposit which can be increased relatively
costlessly and can whenever required be changed back into any
marketable object. Besides, a bank deposit earns interest, whereas, to
reverse Aristotle's famous attack on usury, most barter is barren.
Services, by their nature cannot be stored, so that bartering for future
services, necessarily involving an agreement to pay specific
commodities or other specific services in exchange, weakens even the
supposed normal superiority of current barter, namely its ability to
enable direct and exactly measurable comparisons to be made between
the items being exchanged. In the absence of money, or given the limited
range of monetary uses in certain ancient civilizations, it is little
wonder the completion of large-scale and long-term contracts was
usually based on slavery. Thus the building of the Great Pyramid of
18
THE NATURE AND ORIGINS OF MONEY AND BARTER
Ghiza, the work of 100,000 men, and a logistical problem
commensurate with its immense size, was made possible at that time
only by the existence of slavery (even though these slaves enjoyed higher
standards of living than others). This is not to deny that some relics of
bartering for services still exist in the tied cottages, brewery-owned
public houses and company perquisites or 'perks' today. However
despite the drawbacks in our use of money, particularly the recurrence
of enormously wasteful recessions, caused partly by instabilities
inherent in money itself, it is plain from these few revealing contrasts
with money, that barter inevitably carries with it far greater intrinsic
disadvantages. Thus barter's stubborn survival into modern times and
its occasional flourishes do not mean that it can play other than a
comparatively very minor role in the complex interactions of our
economic life as a whole.
In the uncrowded, predominantly agricultural communities which
preceded modern times, it was possible to carry on a fairly considerable
amount of trade and to enjoy a reasonably high standard of living since
subsistence farming occupied such a large role, even when barter was
the main method of exchange. However, this should not lead us to
conclude that barter and a similarly extensive trade or a comparable
standard of living would be possible in any major area of the modern
world. Attention has already been drawn to the overpopulated areas of
urban squalor in less developed countries, so that, despite the fact that
agriculture is still the major occupation in most developing countries,
the economies of such countries can no longer rely on a mixture of
subsistence farming plus barter but are inescapably dependent upon
their modern monetary systems, however inflationary. Their recent
involvement with bartering in their international trade with the more
advanced countries should therefore be seen in true perspective, as
special cases arising from current pressures and not in any sense a
return to the old pre-monetary methods of barter. For most people
most of the time the economic clock cannot be turned back.
Modern barter and countertrading
Having thus differentiated between modern barter where the
participants are fully conversant with advanced monetary systems and
early barter where such knowledge was either rudimentary or non-
existent, we may now turn to examine a few of the more salient
examples of modern barter and to explain the reasons for this
surprising regression. The many recurrent and the few persistent
examples of barter in modern communities are most commonly though
THE NATURE AND ORIGINS OF MONEY AND BARTER
19
not exclusively associated with monetary crises, especially runaway
inflation, which at its most socially devastating climax destroys the
existing monetary system completely. Thus in the classic and well-
documented case of the German inflation of 1923 the 'butter' standard
emerged as a more reliable common measure of value than the mark.
Towards the end of the Second World War and immediately after, much
of retail trade in continental Europe was based on cigarettes - virtually
a Goldflake or a Lucky Strike standard, which also formed a welcome
addition to the real pay of the invading soldiers. A most interesting and
detailed account of the cigarette currency as seen from inside a German
prisoner of war camp was published by R. A. Radford (1945, 189-201).
Such inflationary conditions were widespread from western Europe
through China to Japan at this time, but the world record for an
inflationary currency belongs to Hungary. Its note circulation grew
from 12,000 million pengo in 1944 to 36 million million in 1945. In 1946
it reached 1,000 million times the 1945 total until at its maximum it
came to a figure containing twenty-seven digits. Its largest
denomination banknote issued in 1946, was for 100 million 'bilpengos',
which since the bil is equivalent to a trillion pengos, was actually for
100 quintillion pengos or P. 100,000,000,000,000,000,000. This
astronomical sum was in fact worth at most only about £1 sterling.
Little wonder that in such circumstances the monetary system
temporarily destroyed itself and people were forced to revert to barter,
at least for use as a medium of exchange even if they continued to use
their currency as a unit of account, though even here for the shortest
possible space of time, until confidence in the new unit of currency, the
forint, had been established.
The breakdown in multilateral trading in the Second World War was
mended only slowly and painfully in the following decade. In the mean
time, as Trued and Mikesell (1955) show, bilateral trade agreements,
most of which included some form or other of barter, became very
common. In fact, these authors concluded that some 588 such bilateral
agreements had been arranged between 1945 and the end of 1954.
Many of these involved strange exchanges of basic commodities and
sophisticated engineering products, such as that arranged by Sir
Stafford Cripps whereby Russian grain was purchased in return for
Rolls Royce Nene jet engines (which were returned with interest over
Korea). However, these awkward methods of securing international
trade were first thought to be due simply to the inevitable disruption of
the war and would fade away completely in time as the normal channels
of peacetime trade were reopened. From the end of the 1950s to the
1970s this faith was justified, and it therefore occasioned some surprise
20
THE NATURE AND ORIGINS OF MONEY AND BARTER
when new forms of barter and 'countertrading' began to grow again in
the 1970s and persisted strongly into the 1980s.
By 1970 a new growth in international barter was already becoming
obvious, with the London Chamber of Commerce having noted some
450 such deals during the course of the previous year, a rate about
twenty times the pre-war average. Already there were some forty
companies in the City of London actively engaged in international
barter. The Financial Times (11 May 1970), reporting on this new
growth in barter, commented that 'We have moved on from the days in
which beads were offered for mirrors to ones in which heavily flavoured
Balkan tobacco is offered for power stations and when apples are
offered for irrigation.' The same article reported that a conference on
barter, arranged by the London Chamber of Commerce was heavily
oversubscribed, with more than 300 representatives present, including
clearing and merchant bankers, members of the Board of Trade and, of
course, academics.
Most of the countries then involved in barter - the eastern bloc, Iran,
Algeria, Brazil and so on - continued to figure prominently a decade or
so later. Thus the Morgan Guarantee Survey of October 1978 reported
yet A New Upsurge' in barter and countertrade, 'an ancient custom
that suddenly is enjoying new popularity'. The largest of the deals
described was a $20 billion barter agreement between Occidental
Petroleum and the Soviet Union. In a similar spirit, Pepsico arranged a
counter-purchase agreement with USSR selling Pepsi-Cola concentrate
to Russia in return for the exclusive right to import Soviet vodka. Levi
Strauss licensed trouser production in Hungary to be paid for by
exports to the rest of Europe, while International Harvester gave Poland
the design and technology to build its tractors in return for a
proportion of such production. 'Iran, short of hard cash but swimming
in oil', said the same source, 'barters to the tune of $4 billion to $5
billion a year, ladling out oil for everything from German steel plants
and British missiles to American port facilities and Japanese
desalinization units.' It was estimated that some 25 per cent of
East-West trade involved some degree of barter, with the proportion
expected to rise to around 40 per cent in the course of the 1980s.
Algeria, India, Iraq and a number of South American countries again
figured prominently in these projections. Five years later the
international interest in barter was still strong, as evidenced by the
influential papers presented at a conference, 'International Barter — To
Trade or Countertrade' held at the World Trade Centre, New York, in
September 1983, dealing with the barter of agricultural commodities, of
metals and raw materials, of the special role of trading houses assisting
THE NATURE AND ORIGINS OF MONEY AND BARTER
21
large western companies to trade with the less developed countries, and
so on.
Among the many reasons for this rebirth of barter are first the fact
that external trade from communist countries is normally 'planned'
bilaterally, and therefore lends itself more naturally to various forms of
barter than does multilateral, freer, trading. This is of course why the
General Agreement on Tariffs and Trade sets its face sternly against
bartering arrangements. Secondly, the international trading scene has
been repeatedly disrupted by the various vertical rises in the price of
crude oil since it first quadrupled in 1973. Thirdly the relative fall in the
terms of trade for the non-oil Third World countries caused them
greatly to increase their borrowing from European and American
governments and banks, a proportion of this being in 'tied' form, and
thus, as with eastern bloc trade, becoming more susceptible to bilateral
bargaining. Fourthly the rise in the world inflationary tide, together
with the monetarist response in the main trading nations, caused
international rates of interest to rise to unprecedented levels and so
raised the repayment levels of borrowing countries to heights that could
not readily be met by the methods of normal trading. In this respect the
recrudescence of barter is simply a reflection of what has become to be
known since the early 1980s as the 'sovereign debt' problem facing the
dozen or so largest international debtor countries, including especially
Mexico, Brazil and Argentina, but also Poland, India and Korea. The
fifth and fundamental cause (though these various causes are interactive
and cumulative rather than separate) is the breakdown in the stability
of international rates of exchange following the virtual ending of the
fixed-rate Bretton Woods system after 1971. With even the dollar under
pressure there was no readily acceptable stable monetary unit useful for
the longer-term contracts required for the capital goods especially
desired by the developing countries. In such circumstances the direct
exchange of specific goods or services for other such goods or services,
assisted by all the various modern financial facilities, seemed in certain
special cases such as those just indicated, to be preferable either to
losing custom entirely or to becoming dependent solely on abstract
claims to paper moneys of very uncertain future value.
Modern retail barter
Most of the examples of modern barter given so far refer to wholesale
trading or large-scale international projects. Barter however continues
to show itself in the retail trade and small-scale level, not only in such
self-evident examples as the swapping of schoolboy treasures but also in
22
THE NATURE AND ORIGINS OF MONEY AND BARTER
much more elaborate and organized ways. Of particular importance in
this connection is Exchange and Mart, an advertising medium which
has been published in Britain every Thursday since 1868. Jevons himself
noticed it in its earliest years and was obviously puzzled that any such
publication, partly dependent on serving such a long obsolete purpose
as barter, should appear to have any use to anyone. He refers to
Exchange and Mart as 'a curious attempt to revive the practice of
barter' and quoted examples of advertisers offering some old coins and
a bicycle in exchange for a concertina, and a variety of old songs for a
copy of Middlemarch. 'We must assume', concluded Jevons, 'that the
offers are sometimes accepted, and that the printing press can bring
about, in some degree, the double coincidence necessary to an act of
barter.' He would no doubt be surprised that the publication has lasted
for well over a century and that on average each issue contains around
10,000 classified advertisements. However, well over 95 per cent of these
are not barter items, though sufficient remain to testify to its original
purpose. A few examples must suffice: 'Exchange land for car, 2/4 acres
freehold land, Dorset, for low mileage 280 SL Mercedes Benz', 'Lady's
Rolex 8363/8, exchange computer, word processor, etc.'; 'Council
exchange, three bedroomed house, Coventry, for same Cornwall',
obviously a very good swap for the advertiser; but then, possibly
remembering the imperative pressures of double coincidence, he adds,
'all areas considered' {Exchange and Mart, 30 June 1983). The example
of council house exchanging is a good reminder of what happens in a
constrained situation where the normal market forces cannot freely
operate. In these circumstances barter offers a way out.
A further reason for the re-emergence of barter in recent years may
be seen as a by-product of the so-called 'black or informal economy'.
According to Adrian Smith 'the informal economy can be seen as one of
the main trends in economic evolution today, going with the continuous
shrinkage in terms of employment and value added, of the production
of goods and the corresponding growth of recorded employment in the
service sector' (Adrian Smith 1981). A contributory factor was tax
evasion. Smith estimated that the informal economy represented about
3 per cent of the economy of the USA, between 2 and IVz per cent of
that of UK, 10 per cent for France and as much as 15 per cent for Italy,
though by the very nature of the 'hidden' economy such estimates could
be hardly more than partly informed guesses. With regard to the
importance of changes in employment in recent years the present writer
has pointed out that 'In little over a decade from 1971 Britain has lost
almost two million jobs from manufacturing - a devastating change;
while almost as significant has been the good news of a gain of around
THE NATURE AND ORIGINS OF MONEY AND BARTER
23
one-and-three-quarter million jobs in services ... a sort of industrial
revolution in reverse' (Davies and Evans 1983). Such a massive switch
has provided a wealth of opportunity for informal economic activities.
Although only a very small proportion of the hidden economy would
involve barter, the point to bear in mind is that, though small, it seems
to be growing vigorously. We may conclude therefore by saying that
although modern man cannot live by barter alone, it may still make life
more bearable for a minority of hard-pressed traders and heavily taxed
citizens in certain but increasingly limited circumstances.
Primitive money: definitions and early development
Perhaps the simplest, most straightforward and, for historical purposes
certainly, the most useful definition of primitive money is that given by
P. Grierson, Professor of Numismatics at Cambridge, viz., 'all money
that is not coin or, like modern paper money, a derivative of coin' (1977,
14). Even this definition however fails to allow for the ancient rather
sophisticated banking systems that preceded the earliest coins by a
thousand years or more. Nevertheless, with that single exception, it
serves well for distinguishing in a general way between primitive and
more advanced money, whether ancient or modern, and in its clarity
and simplicity is perhaps preferable to the almost equally broad but
rather more involved definition suggested by Einzig, as 'A unit or object
conforming to a reasonable degree to some standard of uniformity,
which is employed for reckoning or for making a large proportion of the
payments customary in the community concerned, and which is
accepted in payment largely with the intention of employing it for
making payments' (1966, 317).
On one thing the experts on primitive money all agree, and this vital
agreement transcends their minor differences. Their common belief
backed up by the overwhelming tangible evidence of actual types of
primitive moneys from all over the world and from the archaeological,
literary and linguistic evidence of the ancient world, is that barter was
not the main factor in the origins and earliest developments of money.
The contrast with Jevons, with his predecessors going back to Aristotle,
and with his followers who include the mainstream of conventional
economists, is clear-cut. Typical of the latter approach is that of
Geoffrey Crowther, formerly editor of The Economist, who, in his
Outline of Money, begins with a chapter entitled the 'Invention of
money' and insists that money 'undoubtedly was an invention; it
needed the conscious reasoning power of Man to make the step from
simple barter to money-accounting' (Crowther 1940, 15). It was
24
THE NATURE AND ORIGINS OF MONEY AND BARTER
possibly such gross oversimplifications that caused Paul Samuelson, in
an article on 'Classical and neo-classical monetary theory' to contrast
'Harriet Martineau. who made fairy tales out of economics' with those
'modern economists who make economics out of fairytales' (see Clower
1969,184).
The most common non-economic forces which gave rise to primitive
money may be grouped together thus: bride-money and blood-money;
ornamental and ceremonial; religious and political. Objects originally
accepted for one purpose were often found to be useful for other non-
economic purposes, just as they later, because of their growing
acceptability, began to be used for general trading also. We face
considerable difficulty in trying to span the chronological gap which
separates us from a true understanding of the attitudes of ancient man
towards religious, social and economic life, and similarly with regard to
the cultural gap which separates us from existing or recent primitive
societies. In both ancient and modern primitive societies human values
and attitudes were such that religion permeated almost the whole of
everyday life and could not as easily be separated from political, social
and economic life in the way that comes readily to us with our tendency
for facile categorization. To us the categories may seem sensible and
justified and no doubt they help us to appreciate the role of money (or
of other such institutions) when we relate them to methods of thought
and social, religious, political and economic systems with which we are
familiar. But there are limits to our ability to force ancient or recent
primitive fashions into modern moulds. In particular, primitive moneys
originating from one source or for one use came to be used for similar
kinds of payments elsewhere spreading gradually without necessarily
becoming generalized. For example, moneys first used for ceremonial
purposes, because of their prestigious role were frequently ornamental
also, these purposes being mutually reinforcing. Mrs A. Hingston
Quiggin, in her readable and well-illustrated survey of Primitive Money
gives a number of examples 'to show how an object can be at the same
time currency or money, a religious symbol or a mere ornament'
(Quiggin 1949, 2). However, the penalty of widening the functions of
primitive moneys from their original rather narrow group of roles lay in
weakening their force in their main function. It was a matter of
balancing the formidable powers of money in one narrow group of, say,
religious and ceremonial roles against the greater usefulness which
followed from extending the currency of the money at the cost of losing
part of its original religious or ceremonial associations.
Because of this conflict a division arose (though it had long been
latent) between the experts on primitive economies as to whether or not
THE NATURE AND ORIGINS OF MONEY AND BARTER
25
to exclude the whole body of relatively narrowly functioning primitive
objects from being called 'money' at all (see G. Dalton 1967). Some
would argue that unless such objects can be seen to have performed a
fairly wide variety of functions they should not really be classed even as
primitive money. This view seems to be far too narrow and rules out
much of the long evolutionary story of monetary development. For
money did not spring suddenly into full and general use in any
community, and primitive man commonly used a number of different
kinds of money for different purposes, some of which are almost
certainly older than others. Even today we have not arrived at universal
money, nor even universal banking, and just as we buy houses by going
to see a building society and insurance through the insurance agent
coming to see us, so primitive men saw different moneys being naturally
confined to different groups of uses. The origins of these were quite
varied, and although we emphasize that many of the most important of
these origins were non-commercial, they established concepts, attitudes
and ideas which conditioned the growth in the use of a huge variety of
different kinds of 'money' in ancient and modern primitive
communities.
Loving and fighting are the oldest, most exciting (and usually
separate) of man's activities, so that it is perfectly natural to find that
payments associated with both are among the earliest forms of money.
Thus 'Wergeld', a Germanic word for the compensation or fine
demanded for killing a man, was almost universally present in ancient
as in modern primitive societies. Our word to 'pay' is derived from the
Latin 'pacare', meaning originally to pacify, appease or make peace
with - through the appropriate unit of value customarily acceptable to
both parties involved. Similarly payments to compensate the head of a
family for the loss of a daughter's services became the origin of 'bride-
price' or 'bride-wealth'. The pattern of payment for human services was
sometimes broadened to include the purchase or sale of slaves, who for
centuries acted as 'walking cheque-books'. Although there may be
room to doubt the extent of the direct connections between the
compensatory payments of wergeld and bride-wealth, a number of
social anthropologists argue, with many supportive examples, that they
were closely related both in the nature and scale of payments. Thus
Grierson cites among a number of similar examples the custom of the
Yurok Indians of California where wergeld was identical with bride-
price. He admits, however, that such identities are not evident
everywhere: one could hardly expect it.
Over the course of time, paying for injuring, killing, marrying and
enslaving became elaborated into different values according to the
26
THE NATURE AND ORIGINS OF MONEY AND BARTER
customs of the community concerned, with the tribal chief or head of
state intervening either to accept the payments or to lay down the law as
to what was or was not acceptable compensation. Tribute or taxation,
ransoms, bribery and various forms of protection payments such as
those which we later came to know as 'Danegeld', were all various
means by which the early state became involved in the extension of the
geographical area of the peaceful enforcement of law and hence
confirmed the greater role for the monetary payments that such a peace
made possible. As we approach the medieval period these laws,
specifying the amount and types of indemnities, were encoded. Such
codes, extending from the Celtic laws of Ireland and Wales eastward
through those of Germanic and Scandinavian tribes to central Russia,
exhibit basic similarities and, in contrast with the ancient Mosaic laws
which demanded an eye for an eye and a tooth for a tooth, they
provided peacemaking monetary alternatives. The role of the state in
thus spreading the use of money has been stressed by generations of
economists, but by none more than G. F. Knapp.
Knapp's State Theory of Money considerably influenced Keynes,
through whose efforts the work was translated into English. Knapp was
nothing if not forthright: 'Money is a creature of law . . . the
numismatist usually knows nothing of currency, for he has only to deal
with its dead body' (1924, 1). This view of the role of the state as the
sole creator and guarantor of money, although useful as a corrective to
the metallistic theories current at the end of the nineteenth century,
nevertheless carries the state theory of money to an absurd extreme, a
criticism of which the author himself appears to be aware since in his
preface he defends himself with the plea that 'a theory must be pushed
to extremes or it is valueless' - surely a most dangerously dogmatic
assertion. The main point at issue, however, is simply this, that right
from the inception of money, from ancient down to modern times, the
state has a powerful, though not omnipotent, role to play in the
development of money. Yet neither ancient money nor, despite Sir
Stafford Cripps's view to the contrary, even the Bank of England, is a
mere creature of the state.
Knapp's pre-monetarist emphasis on the fundamental role of the
state in the creation of money does at least consistently reflect the
tendency of German economists in the late nineteenth and early
twentieth centuries to extol the power of the state. Modern monetarists
such as Friedman however, strongly uphold the supremacy of the
market and at the same time seek, inconsistently, to minimize the role of
the state - except in monetary matters: an exception which fits ill with
their basic philosophy. Whatever barriers the state - or academics -
THE NATURE AND ORIGINS OF MONEY AND BARTER
27
may erect within which to confine money, money has an innate ability
demonstrated not only during recent decades but by thousands of years
of history to jump over them. Experts on primitive and modern money
disagree where to draw the line between money and quasi-money
precisely because it is in the nature of money to make any such clear
distinction impossible to uphold for any length of time. Money is so
useful - in other words, it performs so many functions - that it always
attracts substitutes: and the narrower its confining lines are drawn, the
higher the premium there is on developing passable substitutes.
Economic origins and functions
Having emphasized the non-economic origins of money to the extent
required to counteract the traditional strongly entrenched viewpoint,
we may now more briefly examine its economic or commercial origins,
since these require, at this stage, little elaboration. Money has many
origins - not just one - precisely because it can perform many functions
in similar ways and similar functions in many ways. As an institution,
money is almost infinitely adaptable. This helps to explain the wide
variety of origins and the vast multitude of different kinds of objects
used as primitive money. These include: amber, beads, cowries, drums,
eggs, feathers,5 gongs, hoes, ivory, jade, kettles, leather, mats, nails,
oxen, pigs, quartz, rice, salt, thimbles, umiaks, vodka, wampum, yarns
and zappozats, which are decorated axes - to name but a minute
proportion of the enormous variety of primitive moneys; and none of
this alphabetical list includes modern examples like gold, silver or
copper coinage nor any of the 230 or so units of paper currency.
Table 1.1 Functions of money
Specific functions (mostly micro-economic)
1 Unit of account (abstract)
2 Common measure of value (abstract)
3 Medium of exchange (concrete)
4 Means of payment (concrete)
5 Standard for deferred payments (abstract)
6 Store of value (concrete)
5 e.g. the Quetzal used by the Aztecs as currency and adopted as the modern currency
of Guatemala.
28
THE NATURE AND ORIGINS OF MONEY AND BARTER
General functions (mostly macro-economic and abstract)
7 Liquid asset
8 Framework of the market allocative system (prices)
9 A causative factor in the economy
10 Controller of the economy
Because it appeared that, at some time or place, almost anything has
acted as money, this misled some writers, including especially the
French economist, Turgot, to conclude that anything can in actual
practice act as money. One must admit that in any logical (not
chronological) list of monetary functions, such as that suggested in
table 1.1, that of acting as a unit of account would normally come first.
It follows from the fact that money originated in a variety of different
ways that there is little purpose in the insistence shown by a number of
monetary economists in analysing which are the supposed primary or
original and which are the supposed secondary or derived functions (see
Goldfield and Chandler 1981). What is now the prime or main function
in a particular community or country may not have been the first or
original function in time, while what may well have been a secondary or
derived function in one place may have been in some other region the
original which itself gave rise to a related secondary function. Here
again there is exhibited a tendency among certain economists to
compare what appears in today's conditions to be the logical order with
the actual complex chronological development of money over its long
and convoluted history. The logical listing of functions in the table
therefore implies no priority in either time or importance, for those
which may be both first and foremost reflect only their particular time
and place.
Turning back now to the first function listed, it is easy to see that,
since an accounting or reckoning unit is of course abstract, it has in
theory no physical constraints. Theoretically one could easily make up
any word and apply this as an accounting record. As a matter of fact in
recent years the European monetary authorities co-operated in
producing just such a unit - and called it the European 'unit of
account', later becoming the Ecu, a brief forerunner of the euro. There
is an essential connection but not necessarily an identity between
counting and measuring money.
Thus cowries, coins and cattle were (and are) usually counted,
whereas grain, gold and silver were usually weighed: hence come not
only our words for 'spend', 'expenditure', etc., from the Latin
'expendere' but also originally 'pound', as being a defined weight of
silver. But acting as a unit of account is only one of money's functions
THE NATURE AND ORIGINS OF MONEY AND BARTER
29
and although anything picked at random, whether abstract or concrete,
admittedly could act as such a unit - and if a sensible choice, might do
so admirably - this would not necessarily mean that it could perform
satisfactorily any or all of money's many other functions. Although
acting as a unit of account or as a common measure of value - which
are two ways of looking at the same concept - are both abstractions, it
added greatly to the convenience of money if the normally concrete
media of exchange and/or the means of payment carried the same
names as, or were at least consistently related to, money's two abstract
qualities of accounting and measuring. By that is meant that, for
example, one's bank balance is kept in pounds (including subdivisions),
that prices are quoted in pounds, that one is paid in pounds, and that
one pays others for purchases or services also in pounds. But for around
half the long monetary history of the £ sterling in Britain this was not
the case: there was no such thing as a pound; it existed only as a unit of
account. There are numerous similar examples.
As well as the specific functions of money listed in table 1.1 there are
also a number of more general functions. All these various functions
and the changing relationships between them will form the main
subject of the remainder of our study, stemming from cowries to Euro-
currencies. However a few further important aspects of money, not
captured in the given categories, need to be at least hinted at in this
introductory chapter, namely first the dynamic quicksilver nature of
money - or to vary the analogy, its chameleon-like adaptability. Money
designed for one specific function will easily take on other jobs and
come up smiling. Old money very readily functions in new ways and
new money in old ways: money is eminently fungible.
Let us come now to the little matter of definition: what, after all is
money? The form in which the question is put tends to indicate that the
proper place for a definitive definition, as it were, is at the end rather
than near the beginning of our study; but the dictates of custom would
suggest the need at least for this preliminary definition: Money is
anything that is widely used for making payments and accounting for
debts and credits.
The quality-to-quantity pendulum: a metatheory of money
Money is the mechanism by which markets are most perfectly cleared,
whereby the forces of demand and supply continually and competitively
fight themselves out towards the draw known as equilibrium. As we
have just seen with regard to barter, no other mechanism is nearly as
good as money in this function of sending early and appropriate signals
30
THE NATURE AND ORIGINS OF MONEY AND BARTER
to buyers and sellers through price changes, so helping smoothly to
remove excess balances of demand or supply. Markets are, however,
rarely perfect, and in practice even money cannot remove all the
uncertainty surrounding them. There are three fundamental reasons for
market uncertainty. First, the full information and correct
interpretation necessary for perfect balance are costly; secondly, the
aggregate flow of goods and services which form the counterpart to the
total quantity of money changes over time in volume and trading
velocity; and thirdly and most importantly money is by its very nature
dynamically unstable in volume and velocity, in quantity and quality.
We shall see as our history of money unfolds that there is an
unceasing conflict between the interests of debtors, who seek to enlarge
the quantity of money and who seek busily to find acceptable
substitutes, and the interests of creditors, who seek to maintain or
increase the value of money by limiting its supply, by refusing
substitutes or accepting them with great reluctance, and generally
trying in all sorts of ways to safeguard the quality of money. Although
most consumers and producers are at some stage both debtors and
creditors it is their net power that influences the value of money. What is
most interesting in historical perspective is to analyse the long-term
pendulum movements between the net forces of debtors, which cause
the pendulum to swing excessively towards depreciating the value of
money, and the net forces of creditors which act strongly the other way
to raise the unit value of money or at least to moderate the degree of
depreciation. While the historical record will confirm popular
condemnation of the inflationary evils of an excessive quantity of
money, it will also point to the more hidden but equally baneful effects
when excessive emphasis on quality has severely restricted the growth of
the economy.
Although monetary stability may be to the long-term advantage of
the majority, there are always strong minorities who tip the net balance
of power and who wish to increase or decrease the value of money. They
thus help to push the pendulum into a state of almost perpetual
motion. During all periods of history the debtors are generally much
poorer and always much more numerous than the normally more
powerful and less numerous creditors, even though by definition the
total of debts and credits is the same. In this context it is the
distribution which matters, while it should be remembered that debtors
can and often do include the most powerful of politicians and the most
ambitious of entrepreneurs. For long periods of history the most
important net debtor has been the single monarch or the composite
state, each possessed with a varying degree of sovereign power to
THE NATURE AND ORIGINS OF MONEY AND BARTER
31
determine the supply of money, though never with complete control
over the acceptability of money substitutes. Not surprisingly when the
state becomes a net debtor the pendulum tends to widen its oscillations.
An indebted monarch or government is usually able not only to
reduce the real burden of its own debt, but can as a bonus consciously
or unconsciously court popularity with the indebted masses by
allowing the net pressures of indebtedness to increase the supply of
money or the acceptance of substitutes and so lift some of the heavy
burden of debt from the shoulders of the poor masses - and from many
up-and-coming entrepreneurs. There is therefore a secular tendency for
money to depreciate in value, a tendency halted or partially reversed
whenever net creditors, such as large landowners, rich moneylenders
and well-established bankers, are in the ascendancy or can bring their
usually powerful influence to bear upon governments.
Corresponding therefore to our simple preliminary definition of
money we have a simple theoretical framework for assessing changes in
the value of money, namely the 'pendulum theory' or more fully, the
'oscillating debtor-quantity/creditor-quality theory'. At any given
time, especially after drastic changes have taken place in monetary
affairs, a whole host of theories may arise in attempts to explain the
existing value of money. Given a wider historical perspective these
temporary theories, whatever they are called, group themselves with
little distortion into either debtor-quantity or creditor-quality
theories. The pendulum theory brings these two apparently
contradictory and divergent sets of theories together into a symbiotic
union. It indicates why these temporary theories, like certain aspects of
money itself, tend to rather extreme oscillations, and helps to explain
why such opposite theories tend to follow each other in repeated
alternations over the centuries, interspersed with the occasional long
period of comparative stability.
The pendulum theory is therefore of particular relevance to the long
perspectives of monetary history and yet may shine some light on
current financial controversy, for it is within the vectors of that wider
theory that the shorter-term, fashionable 'temporary' theories
appropriate to the particular period in question play out their powerful
but inevitably limited roles. In this sense the pendulum theory acts as a
metatheory of money, i.e. a more general theory comprising sets of
more limited, partial theories, which latter spring out of the special
circumstances of their time. The enveloping pendulum or metatheory
also explains why the usual theories of money, despite being so
confidently held at one time, tend to change so drastically and
diametrically (and therefore so puzzlingly to the uninitiated) to an
32
THE NATURE AND ORIGINS OF MONEY AND BARTER
equally accepted but opposite theory within the time span appropriate
to historical investigation. The longer view given by the pendulum
theory may also help to correct the dangerous 'short-termism' present
in much current financial theory and practice.
The most recent, and therefore perhaps the most obvious, example of
the workings of the pendulum theory can be seen in the enormous
swing from almost universal acceptance in theory and policy of the
broadly based but temporary 'liquidity theory of money' held by the
Keynesians to the later fashionable, widely based acceptance in theory
and still more in practice of the very narrowly based monetarist
theories of Milton Friedman and his followers. Another recent example
of the age-old principle of the pendulum may be seen in the much
discussed tendency of the external values of currencies to 'overshoot'
their equilibrium values in the foreign exchange markets once they
became free to move away from much of their fixed-rate anchors. The
extreme volatility of rates of interest in much of the post-war period
points to a third instance of the pendulum in vigorous 'overkill' action.
In the chronology of oscillation, quality comes first; for if whatever is
intended to act as money is not desired strongly enough to be held for
that purpose, it will fail to be selected long enough to be imitated. Once
the selection is confirmed by general acceptance then, sooner or later,
depending on the society in question, quality faces competition from an
increased quantity of substitutes. Monetary imitation is the most
effective form of flattery. As quantity increases so quality generally falls,
and if the process is speeded up, the currency may become completely
discredited and useless, requiring replacement by a new monetary form
which emphasizes its special quality; hence the periodic currency
reforms which punctuate monetary history, followed by eventual
backsliding.
It follows from the pendulum theory that the nearer the money
supply is kept to its equilibrium position, the more moderate will be the
policy measures, such as variations in the official rate of interest,
required to re-establish equilibrium. Conversely, a wide swing away
from equilibrium will require such strong counteracting policy
measures, such as very large changes in interest rates, that dangerous
'overshooting' or 'overkill' will commonly result. A monetary stitch in
time saves nine.
Finally it is of the utmost significance to realize that because the
monetary pendulum is rarely motionless at the point of perfect balance
between the conflicting interests of creditors and debtors, so money
itself is rarely 'neutral' in its effects upon the real economy and upon
the fortunes of different sections of the community, for all sections are
THE NATURE AND ORIGINS OF MONEY AND BARTER
33
involved all the time in their daily lives. Monetary changes of any
substantial weight could only be neutral if everyone had the same
amounts, incomes, wealth, debts, expectations, etc., as everyone else: an
impossibility. On this point Kindelberger quotes Schumpeter as
'doubting that money can ever be, neutral'. (See Kindelberger, C. P., A
Financial History (1994 ed., p. 4).)This feature further enhances the
importance of money in economic, social and political history.
2
From Primitive and Ancient Money to
the Invention of Coinage, 3000—600 bc
Pre-metallic money
If economics, defined briefly, is the logic of limited resource usage,
money is the main method by which that logic is put to work. In
commonsense terms, therefore, economics is very largely concerned
with how to make the most of one's money, since the allocation of
resources and changes in the valuation of assets necessarily involve
accountancy and payment systems based on money, although the
degree to which such allocations are left to the freedom of the market,
and therefore the demands which are made upon the efficiency of the
monetary system, will vary from place to place and age to age. It is
important, however, to realize that the close relationship between the
development of money and its efficient use in the allocation of
resources is complex and convoluted. In particular the logical and
chronological developments are not exactly parallel. Thus, as has
already been noted, one would logically expect all pre-metallic moneys
to be associated exclusively with primitive communities, and similarly
all metallic money to be associated exclusively with more advanced
societies. But this is far from being the case, and the logical order differs
significantly from the chronological. Thus the development of banking
in Britain followed a thousand years behind the introduction and
widespread use of coinage. To us this seems both a natural and a logical
process of development and we may at first find it difficult to believe
that that process could be reversed. But banking in Babylon preceded
the 'invention' of coinage by a similarly long period. Again, we find
firms in Birmingham in the first decades of the twentieth century still
manufacturing metallic bracelets for use as primitive forms of money
TO THE INVENTION OF COINAGE, 3000-600 BC
35
among certain Nigerian tribes, in preference to the coinage systems
which were readily available for their use and which the state authorities
had been trying to enforce with little success for many years.
When we come to look at many of the earliest types of coins, we shall
see that these were produced as direct imitations of those primitive
types of currency with which the communities concerned had long been
familiar. Primitive moneys may be recent, banking may be ancient.
Consequently in seeking to combine as far as is possible the
chronological with the logical stages of financial development, their
sometimes strongly conflicting currents should always be borne in
mind. Even in our own days, innovation and progress are not
necessarily synonymous terms: apparently it has always been thus.
Therefore, in presenting the mainstream of development we should not
remain unaware of the counterforces which occasionally run strongly in
the opposite direction, nor ignore the fact that the mainstream may
itself flow in sluggish meanders back upon itself and thus reverse some
of the progress formerly made. In tracing the advance from primitive
cowries to early coinage we must therefore necessarily be diverted into a
study of early banking, a sophisticated and promising development
which was first helped and then hindered by the rise of coinage systems.
Since, according to Toynbee's Study of History, over 650 separate
primitive societies — most of which were still in existence in the
twentieth century - have been categorized by social anthropologists,
and since most of these have used one or more forms of primitive
money, it follows that the subject of primitive money is of vast
proportions (Toynbee 1960, chapter 3). Moreover despite the debt that
present students owe to scholars like Einzig, he believed the subject to
be still 'largely a terra incognita\ and emphasized that practically every
chapter of the ethnological and historical sections of his book could
and should be expanded into a full-size volume (1966, 518).
Unfortunately, despite the appeal and importance of this fascinating
subject, only a handful of primitive moneys can be touched on in this
study, and these few are chosen in order to illustrate the timeless
relevance of the subject. However, the total populations using primitive
money throughout time have been very small compared with the many
millions in the vast populations of civilized, coin-using communities.
While the allocation of space in studies of the historical development of
money must inevitably be somewhat arbitrary, the present writer would
strongly commend Einzig's view that monetary economists should take
much more interest in examining primitive money to compensate for
their previous neglect, and that our understanding of modern money
would be significantly improved were this wise advice followed.
36
FROM PRIMITIVE AND ANCIENT MONEY
The ubiquitous cowrie
Of the many hundreds of objects that have been used as primitive
moneys we begin with the cowrie because of all forms of money,
including even the precious metals, the cowrie was current over a far
greater space and for a far greater length of time than any other. The
cowrie is the ovoid shell of a mollusc widely spread over the shallower
regions of the Indian and Pacific Oceans. It comes in various types,
colours and sizes, from about the size of the end joint of the little finger
up to about the size of a fist. The most prolific single source was the
Maldive Islands whence for hundreds of years whole shiploads were
distributed around the shores of Oceania, Africa, the Middle and Far
East, their values rising as they became scarcer farther from their point
of origin. Quite apart from their religious and obvious ornamental
qualities, the cowries are durable, easily cleaned and counted, and defy
imitation or counterfeiting. For many people over large parts of the
world, at one time or other they have appeared as an ideal form of
money. Modern moneys found the cowrie a formidable rival, especially
for items of small value. An interesting example of their modern use
was described to the writer by one of his Nigerian students, who as a
small boy regularly collected the smaller cowries which tended to be
lost during the hustle and bustle of the open Ibo fair days. If he
managed to collect between six and eight of these, he could purchase
something useful to eat or play with. This personal illustration is also a
powerful reminder of the speed of change in financial matters in
developing countries, for the student concerned, Dr G. O. Nwankwo,
later became the first professor of banking and finance at the University
of Lagos and an executive director of the Central Bank of Nigeria and
chairman of one of the country's largest commercial banks, in which
capacities he has represented his country abroad at OPEC and similar
conferences - from cowries to petro-currencies in the course of a single
career.1
Across the other side of Central Africa, when cowries were first
introduced into Uganda towards the end of the eighteenth century, two
cowries in the most remote regions were known to have been sufficient
to purchase a woman; by 1860 it required one thousand cowries for
such a purchase. As trade grew and cowries became more plentiful they
naturally depreciated further, but were still officially accepted for
payment of taxes until the beginning of the twentieth century. It was
only with the penetration of the country by the Uganda Railway that
1 See also M. Johnson, 'The Cowrie currencies of West Africa', in D. O. Flyn, Metals
and Monies in an Emerging Global Economy (London, 1977) .
TO THE INVENTION OF COINAGE, 3000-600 BC
37
coins gradually took over from cowries, and only then for medium- and
large-sized transactions. By the 1920s literally thousands of tons of
cowries had been brought into Africa, not only from the Maldives but
from other areas as they became progressively even more devalued
elsewhere, and in so doing accelerated the depreciation of the cowrie in
the internal regions of Africa also. However, in East as in West Africa it
took until the middle of the twentieth century before the cowries
virtually disappeared from circulation for the smallest purchases,
especially in the remotest districts. Their attractiveness plus their
immense circulation and prolonged popularity have caused them not
only to coexist with modern types of moneys, but from time to time the
cowrie has pushed debased coinage from official acceptance in a
strange reversal of Gresham's Law. Many such examples have been
recorded in the long history of Chinese currency, for in this as in many
other aspects of civilization the Chinese offer the longest sequence of
authentically recorded development. So important a role did the cowrie
play as money in ancient China that its pictograph was adopted in their
written language for 'money' (See Cribb, in M. J. Price 1980, 296).
Fijian whales ' teeth and Yap stones
In contrast to the vast range of the cowrie two much more
geographically limited types of money are the sperm whale's tooth or
'tambua' of the Fijian group of islands, and the peculiar stone currency
of the island of Yap. The ceremonial origins of the former are
demonstrated by its continued use as part of the ritual of welcome to
visiting royalty, as on the occasion of the visit of Queen Elizabeth and
the Duke of Edinburgh in 1982. Official receptions are still unthinkable
without such a formal presentation of a whale's tooth, representing as it
does, deep-rooted Fijian cultural traditions. As well as their uses in
official ceremonials, whales' teeth were also used as bride-money, with
a symbolic meaning similar to that of our engagement ring. Much
prestige was derived from the ownership of whales' teeth, which were
constantly oiled and polished and, in earlier days, considered to be far
preferable even to gold. Thus when a chest of gold coins was captured
aboard a trading brig off one of the Fijian islands in the mid-nineteenth
century the finders put them to a novel use. They literally threw them
away playing 'ducks and drakes', for which purpose one supposes that
they were absolutely ideal, although few westerners, however rich,
could vouch personally for this novel function of modern money, or
imagine a more happily disdainful treatment of these westernized
'barbaric relics'. One of the young Fijians among the party that had
38
FROM PRIMITIVE AND ANCIENT MONEY
played with the plundered gold coins became in later life a government
official, shortly after Fiji became a British Crown Colony in 1874, and
was still reluctant to accept payment in sterling silver or even gold
sovereigns. He requested to be paid instead in the traditional whales'
teeth since with these he could demonstrate his prestige and authority
much more convincingly than with mere modern money, which,
although then of full intrinsic value, yet lacked the sacred attributes so
conspicuously associated with the 'tambua'. The customs associated
with tambua were first described in detail in Captain James Cook's
Journal of his voyages through the Fijian and Tongan islands in 1774.
To the Pacific islanders the term possesses a positive significance
suggesting a sacred sense of proper or fit usage, as well as the negative
form to which we have become accustomed to limit the term 'taboo'.
Thus although the monetary functions performed by the tambua might
be rather weak at one end of the spectrum, they compensated by
vigorously performing a number of ceremonial and religious functions
at the other end of the wide spectrum of monetary custom and usage.
The peculiar stone currency of Yap, a cluster of ten small islands in
the Caroline group of the central Pacific, was still being used as money
as recently as the mid-1960s. The stones known as 'fei' were quarried
from Palau, some 260 miles away, or from the even more distant Guam,
and were shaped into discs varying from saucer-sized to veritable
millstones, the larger specimens having holes in the centre through
which poles could be pushed to help transport them. Despite centuries
of at first sporadic and later more permanent trade contracts with the
Portuguese, Spanish, German, British, Japanese and Americans, the
stone currency retained and even increased its value, particularly as a
store of wealth. It seems highly appropriate that James Callaghan, who
a few decades later was destined to become Chancellor of the
Exchequer and Prime Minister, was informed that these stones were
still internally important when he visited the Yap islands in 1945 when
serving in the Royal Navy; though the American dollar was already
current for most purchases involving external trade. When Mr
Callaghan became Chancellor of the Exchequer from 1964 to 1967, he
was automatically also Master of the Mint and therefore ultimately
responsible for the new coins issued by the Mint to a number of Pacific
Islands, where primitive currencies had still been in use thirty years
earlier. The completed triumph of coinage over indigenous primitive
moneys in the islands of the Pacific and Indian Oceans may be
illustrated by noting that the Royal Mint at Llantrisant produced in the
financial year 1981/2 coins for fifty-seven countries overseas, including
the Maldive Islands - the home of the cowrie - Fiji, Tonga, Tuvalu,
TO THE INVENTION OF COINAGE, 3000-600 BC
39
Kiribati, Papua and the Seychelles; though not Yap, whose dollars were
minted in USA (Royal Mint, Annual Report 1982, 11). The Royal Mint
produced coins or blanks for 61 countries in 2000, for far more
countries than any other mint (Report for 2000-1).
The largest of the stone discs now in Yap include two fully 20 ft in
diameter, which remained in the mid-1950s at the bottom of Tomil
harbour where they had accidentally sunk. They had been quarried
under the direction of a certain Captain O'Keefe, an American-Irish sea
captain who, shortly after becoming shipwrecked in Yap in December
1871, set himself up as the largest trader in that part of the Pacific and
'ruled' as 'His Majesty O'Keefe' until his death in the great typhoon of
1901. Also used as subsidiary currency to 'fei' were shell necklaces,
individual pearl shells, mats and ginger. But it was the stones which
were 'the be-all and end-all of the Yap islander. They are not only
money, they are badges of rank and prestige, and they also have
religious and ceremonial significance' (Klingman and Green 1952, 45).
Though of limited use as currency they were nevertheless without
doubt by far the most acceptable form of money to the Yap islanders. In
contrast to the Fijians who have had to use legal measures for strictly
limiting the export of their precious stock of whales' teeth, the Yapee
administration has relied mainly on the penalties of very high prices to
limit those foreign purchasers, such as curators of museums, who have
in recent years been seeking to acquire specimens of one of the world's
most peculiar forms of primitive money. One of the largest of such
stones stands proudly but somewhat eccentrically in the courtyard of
the Bank of Canada in Ottawa. The tambua and the fei have both been
criticized as not quite deserving to be called money because of certain
limitations in their usage; but such criticisms ignore the compensating
functions beyond the materialistic range of modern money.
Wampum: the favourite American-Indian money
One of the long-lasting difficulties of the early colonists of North
America was how to establish a generally acceptable monetary system.
The chronic shortage of coin caused them to jump from one expedient
to another. Thus in 1715 the authorities in North Carolina declared
that as many as seventeen commodities including maize and wheat were
legal tender. Strangely enough, there already appeared to be a much
commoner and more generally acceptable currency when it came to
dealing directly with the indigenous communities, namely, strings of
(mainly) white beads. In course of time these beads were also generally
accepted among the colonists themselves. 'Peag' is the Indian word for a
40
FROM PRIMITIVE AND ANCIENT MONEY
string of beads and 'wampum' meant 'white', the most common colour
of their money, hence the full title of their famous currency
'wampumpeag' is usually abbreviated to 'wampum'. The earliest
account of this widespread Indian currency was given by Jacques
Cartier in 1535, who noted an unusual additional function, its
usefulness in stopping nose-bleeding, a curative property which his
exploratory party tested and confirmed. This is a quaint reversal of the
better-known nasal connotations of money, namely 'to pay through the
nose', which telling phrase stems from the disconcerting habit of the
Danes in Ireland, who in the ninth century slit the noses of those unable
or unwilling to pay the Danish poll tax. One of the most detailed of the
early accounts of the development of wampum as currency was that
given by Roger Williams, a Welsh missionary who after graduating
from Cambridge in 1627 emigrated to Boston in 1631 and made a
comprehensive study of the languages and customs of a number of the
Indian tribes of north-eastern America.
Wampum was made out of the shells of the clam (Venus Mercenaria)
and other similar bivalves which were most plentiful in the estuarine
rivers of the north-east of America and Canada. Naturally wampum
was most commonly used in what are now the coastal states from New
Brunswick and Nova Scotia in the north to Florida and Louisiana in the
south; but wampum spread inland also and was used by certain tribes
right across the continent. The powerful Iroquois amassed large
quantities by way of tribute, though they lived far from the original
source of wampum. The shells are mostly white but with a smaller deep
purple rim. The scarcer 'black' or blue-black wampum was usually
traded at double the price of the white. The average individual piece of
wampum was thus a cylindrical bead about half an inch or so long and
between an eighth and a quarter inch in diameter, with a hole drilled
lengthwise for stringing; but other shapes and sizes were not
uncommon. Even the genuine highest-quality wampum became
depreciated over time in quality as well as through increased quantity.
For normal currency purposes the wampum strings were either about
18 in. or 6ft long and were therefore usually reckoned in cubits and
fathoms, but on occasions singly or in feet; they were eminently
divisible. Some tribes, such as the Narragansetts, specialized in
manufacturing wampum, but their original stone-age craftsmanship
was swamped when the spread of steel drills enabled unskilled workers,
including the colonists themselves, to increase the supply a
hundredfold. Thus that tribe lost its partial monopoly. Even before this
massive devaluation brought about mostly through greatly increased
quantities but partly also through poorer quality, the exchange value of
TO THE INVENTION OF COINAGE, 3000-600 BC
41
wampum fell with the decline in the value of beaverskins. Roger
Williams found it difficult to explain this relationship to Indian traders
who saw the value of their wampum halved in a few years, and saw this
as deliberate cheating by the white traders. Of course it is always a
temptation to personalize the laws of supply and demand behind which
the authorities, however constituted, are always prone to hide their own
failings.
As an indication of the essential role wampum played in early
colonial days even among the white settlers, it was made legal tender in
a number of the original thirteen American colonies. In 1637
Massachusetts declared white wampum legal tender at six beads a
penny and black at three a penny, but only for sums up to one shilling.
Apparently this experiment succeeded, for the legal tender limit was
raised to £2 in 1643, a substantial amount for those days and far
exceeding the real value of our coinage limits today. Although wampum
ceased to be legal tender in the New England states in 1661, it still
remained a popular currency in parts of North America for nearly 200
years subsequently, although the blanket and the beaverskin were strong
competitors among the Indians of Canada. In 1647 Peter Stuyvesant,
the director general of New Netherland, raised a loan via a merchant in
Albany of between 5,000 and 6,000 guilders in wampum in order to pay
the labourers' wages for the fort he was building in New York (Myers
1970, 3). Around 1760 demand in New England still remained strong
enough to justify starting a wampum factory, opened in New Jersey by
J. W. Campbell, where an expert worker could produce up to 20 ft of
wampum a day. This factory remained in production for a hundred
years. Thereafter, although retaining its ornamental attributes,
particularly for belts, bracelets and necklaces, wampum generally faded
away for currency purposes, and modern coinage almost completely
replaced it even for small change by the last quarter of the nineteenth
century. However, the belts were still used in competitive exchanges well
into the present century, and even now help to sustain the growing
tourist trade.
Wampum's monetary death therefore resembled its birth, for its use
as money undoubtedly came about as an extension of its desirability for
ornamentation. Indeed there is a considerable degree of doubt about
the extent to which wampum was actually used as currency before the
arrival of the colonists, but again, its possible weakness in this regard
was compensated by taking into account its psychic functions.
However, both before and after it acquired its additional uses as a
medium of exchange and a means of payment it functioned strongly as
a store of value. The step from the European coinages of their
42
FROM PRIMITIVE AND ANCIENT MONEY
homelands to the use of primitive beads was thus more of a sidestep
than a sign of backwardness. In the meantime, while Americans and
Canadians were sorting out their own monetary systems, they found
the humble strings of beads a most desirable and durable bridge to
more modern forms of money, performing quite well for a considerable
period all the functions of a modern money, from accounting and acting
as a means of payment - or 'shelling out' - to providing usefully
compact and durable stores of value. Although the American example
of a more advanced economy incorporating and adapting primitive
money is the best known, it is far from being an isolated case. The same
process occurred in many other instances, including the ancient
civilizations of Egypt and China, and even showed itself to such an
absurd degree in nineteenth-century England that Charles Dickens felt
constrained to pour his powerful contempt on British official insistence
on using primitive wooden forms of money right into the modern era.2
Cattle: man 's first working-capital asset
Just as the cowrie played a major part in primitive money from the point
of view especially of being a medium of exchange, so cattle have occupied
a central role in the long evolution of money as units of account. Cattle —
a vague term variously meaning cows, buffalo, goats, sheep and camels,
and usually but not always excluding horses - historically precede the use
of grain as money for the simple reason that the taming of animals
preceded agriculture. Despite their age-long use as money, some
authorities on primitive money would contend that cattle cannot be
properly considered as money because, being such a 'heavy' or expensive
unit of account and standard of value, they were not very suited to
performing the other more mobile functions of being a good means of
payment and medium of exchange, which apparently demanded
something much smaller than, say, a cow. But if the 'pound' sterling was
clearly accepted as money for hundreds of years during which it had no
physical existence and despite being a 'heavy' currency, cattle, which at
least do have a very substantial physical presence, may with even greater
justifiability be called money, provided only that they are of course used
for monetary purposes, as they indubitably were, with sheep, goats and
hides being used, among other objects, as subsidiary 'coinage' where
emphasis was required on the mobile monetary functions.
As we have stressed, it is quite wrong to consider the various
functions of money to be separated by unclimbable barriers. In
particular one should not confuse the abstract concept of an ox as a
2See p. 365.
TO THE INVENTION OF COINAGE, 3000-600 BC
43
unit of account or standard of value, which is its essential but not its
only monetary function, with its admittedly cumbersome concrete
physical form. Once that is realized (a position quickly reached by
primitive man if not yet by all economists or anthropologists), the
inclusion of cattle as money is easily accepted, in practice and logic.
Smaller animals or more convenient physical objects - so many sheep
and goats for a cow or camel, so many chickens for a sheep or goat, and
so on — can easily supplement the apparent but unreal problem of
having a heavy accounting unit, just as the old pound was divided into
20 shillings, 240 pennies and 960 farthings. In any case it has been the
common custom among primitive communities to have more than one
money medium, each one necessarily being linked with the particular
unit of account. Until well into the present century horses were the
main monetary unit of the Kirghiz of the Russian steppes, and formed
their main store of value, though sheep were used as subsidiaries, with
lambskins being used as small change. To exclude one of the world's
longest-lasting and one of its most uniform financial accounting units
from being money just because it was better at performing some
functions than others would be as unjustified as excluding cowries or
wampum because, being individually of small value, their monetary
functions were performed less well for large as compared with smaller
amounts. Just as cowries and wampum could be aggregated in
bucketfuls, basketfuls or stringfuls to overcome the apparent
disadvantages of their small size, so over many millennia it has been
easy to think up and apply in practice subsidiaries for bovine currencies
without having to resort to imaginary slaughter whenever the
equivalent of a pound of flesh was required in exchange.
Cattle used as money were of course counted by head so that, for
monetary purposes at least, quantity has generally though not
invariably been more important than quality. The preference for
quantity over quality is well illustrated in this account of Negley
Farson's contacts with the Wakamba, a Kenyan pastoral tribe, just
before the Second World War. Much more recent reports indicate that
the attitude displayed by the Wakamba has not materially altered. An
agricultural expert had been trying to persuade the tribal chiefs not to
keep their old and diseased cattle. In reply one of the Wakamba
answered: 'Listen, here are two pound notes. One is old and wrinkled
and ready to tear; this one is new. But they are both worth a pound.
Well, it's the same with cows' (Farson 1940, 264).
The same attitude to cattle is shared by the Masai and, with regard
to goats, by the Kikuyu among whom Jomo Kenyatta, the 'father of
modern Kenya' was himself reared. The common unfortunate
44
FROM PRIMITIVE AND ANCIENT MONEY
ecological result of this economic characteristic has been a marked
tendency towards overgrazing which from time to time has turned
grasslands into desert, and which explains why in recent times the
introduction of modern money has been stressed by state authorities for
soil conservation as well as for other more obvious economic purposes.
Attempts to change farming practices to control erosion appear
doomed to delay if not failure. Thus in 1938 the economist A. E. G.
Robinson stressed the need 'to change the attitude of the native towards
his domestic animals that they become not tokens of wealth or a form
of currency but a source of income'. The Global 2000 report projects a
world increase in cattle of 200 million between 1976 and the end of this
century and points out that in the twelve years between 1955 and 1976
Africa's sheep and goat population increased by over 66 million {Global
2000 1982, 232-5). Attention has already been drawn, in the case of the
Indian tribes of Canada, to the deleterious results of replacing the old
with a new money system: here one may see the dangerous effects, given
the increased pressure of human and animal populations on limited
resources, of maintaining one of the oldest monetary systems in the
world. In 1983 the new Brandt Commission re-emphasized 'the need to
halt and reverse these processes of ecological degradation, which now
assume emergency proportions' and estimated the cost of doing so as
'well over $25 billion by the end of the century' (p. 126). In certain
instances, particularly when cattle were used for sacrifices, the quality -
'without spot or blemish' - was important, and in a number of such
cases the religious usages of cattle probably preceded their adoption for
more general monetary purposes. But there need be no incompatibility
in the argument as to the relative merits of quality as opposed to
quantity - good or bad, the essence of the argument is that they were in
either case money. Furthermore, they were movable, an immense
advantage, forming man's earliest working capital and the linguistic
origin not only of our 'pecuniary' from the Latin 'pecus' or cattle, but
also our terms 'capital' and 'chattels'. Similarly the Welsh 'da' as an
adjective means 'good', and as a noun, both 'cattle' and 'goods'.
Although these examples of the cultural, ecological and economic
relationships of the monetary use of cattle are taken mostly from the
modern world, similar problems of overstocking and resalinization,
even if on a much smaller scale, occurred in the ancient world also,
particularly in Mesopotamia and along the North African coastal area.
The latter, once in large part the granary of the Roman empire and
more recently feeder of the empty imperial dreams of Mussolini, is now,
despite its vestigial wells which slaked the thirst of the Eighth Army,
simply a northern extension of the Sahara. The use of cattle as visible
TO THE INVENTION OF COINAGE, 3000-600 BC
45
and useful evidence of wealth and its superiority as a form of money for
many centuries in various communities around the world combine to
explain why it has not always been very easy to substitute modern
money in place of cattle in primitive pastoral communities. The other
staple food used as money, namely grain, will be considered shortly in
the context of the monetary development of ancient Egypt. We turn
first, however, to the essential preliminary stage on the road to coined
money; the use of metals as money.
Pre-coinage metallic money
To primitive man emerging from the Stone Age, any metal was precious:
the distinction between base and precious metals became of significance
only after his skill as a metallurgist had improved and supplies of various
metals had increased sufficiently to reflect their relative abundance or
scarcity. Thus copper, bronze, gold, silver and electrum were known and
used before iron, while aluminium, the most common metal in the earth's
crust, became available for use only in the nineteenth century. It was first
named by Humphrey Davy in 1809, first isolated by Hans Christian
Oersted in 1825, introduced to the public as one of the special attractions
of the Paris Exhibition of 1855, while its ranking as a precious metal was
confirmed by Napoleon III, who temporarily laid aside his gold plate to
eat off aluminium on state occasions. Within a relatively short period of
time millions of soldiers in the two World Wars were also eating off
aluminium plate without considering it in any way luxurious, while for a
number of years in the immediate post-Second World War period certain
European countries resorted to the use of aluminium coins. This was,
however, considered to be very much an emergency and far inferior to the
more normal use of the heavier metals, of copper, brass, etc. to which
they promptly returned, aluminium being considered no longer fit for
even the humblest tokens.
The eagerness with which metals were accepted by late Stone-Age
man and their growing indispensability once he had become
accustomed to them together form the key explanation as to their ready
transformation into use as money. Indeed the word for 'silver' and
'money' has remained the same from prehistoric to modern times in a
number of languages, e.g. French 'argent' and Welsh 'arian'. The metals
therefore formed a strong and wide bridge from primitive to modern or
coined money. There is no need at this point to dwell on their
ornamental attributes, which obviously helped enormously in making
and maintaining their almost universal acceptability, but it is perhaps
more appropriate to note here how often the metals began to be used
46
FROM PRIMITIVE AND ANCIENT MONEY
symbolically in imitation of and as a more valuable extension of the
age-old primitive moneys. The Chinese at the end of the Stone Age
began for instance to manufacture both bronze and copper 'cowries';
and these dumpy imitations, which must have represented very high
values at least when they were first introduced, are considered by some
numismatists to be among the earliest examples of quasi-coinage,
although this depends on how strictly one defines the term.
The transition from specific usage as tools to symbolic and more
general usage as media of exchange and units of account may also be
seen in a range of metallic objects made of copper, bronze and iron,
such as axes, spears, knives, swords, hoes and spades. Swords and
spears were obviously treasured possessions, replicas of which could
conveniently be reduced in size as they lost their purpose and became
used as money. A number of writers have commented on Julius Caesar's
castigation of the ancient Britons for still using crudely made iron
sword-blades as currency when more civilized Europeans had long used
coins; but, as Einzig points out, the Greeks themselves had earlier been
using iron spits or nails as money at a time when they could hardly have
been derided by Romans as being backward (1966, 235) Spade, hoe and
knife money is best looked at below in the section on Chinese coinage
as being logically inseparable from any discussion of the 'invention' of
coinage. Meanwhile a brief examination of the non-representational
monetary use of pre-coinage metal may be in order.
As well as representational or symbolic money, metals have long been
used more simply and directly as money, sometimes just as unmarked
lumps of various shapes and sizes but more often in the form of rods,
wire coils and rings, anklets, bracelets and necklaces, that is in forms
which were intended especially to facilitate their acceptance as money.
A particularly interesting example of this wide-ranging group of
metallic moneys is to be seen in the 'manilla' currencies of West Africa.
The manilla is a metal anklet, bracelet or front section of a necklace,
depending on its size and curvature, usually of copper or brass, long
used in parts of West Africa, particularly in Nigeria, for money which
could be conveniently and ornamentally carried on the person. Its
linguistic and actual derivations are in considerable doubt. Its claimed
linguistic origins range from being possibly derived from Spanish or
Portuguese 'little hand' (from Latin 'manus') to a most unlikely
combination of Phoenician and Irish. Claims as to the actual physical
origins of the manilla are, with varying probability, ascribed to either
ancient Phoenician trading links between Tyre and Sidon with West
Africa, or spring from the attractiveness of the bolts, clamps and other
such metal devices salvaged from the ships of early Portuguese
TO THE INVENTION OF COINAGE, 3000-600 BC
47
explorers wrecked on the Guinea coast in the fifteenth century. It is a
recorded fact that in the short period 1504-7 just one trading station
alone along the Guinea coast imported 287,813 manillas from Portugal.
The Irish connection stems from the more than superficial resemblance
between current manillas and ancient Celtic torque ornaments found in
Ireland. These various explanations as to the origin of manillas are not
mutually exclusive. We know that the ancient Phoenician traders
exported considerable quantities of open-ended bracelets to their
distant trading centres including Ireland and West Africa.
Although attempts had been made as early as 1902 to suppress the
manilla, attempts which were repeated by the West African Currency
Board after its formation in 1912, the United Africa Company still
found it necessary to trade in manillas in the immediate post-Second
World War period. Eventually, after a long struggle they were officially
withdrawn from circulation in 1949, and a little later this recent
triumph of modern bureaucracy over primitive money was celebrated
by the issue of special postage stamps. The tribes who, like the Ibo,
stubbornly preferred cowries and manillas to coins, are eloquent
examples of the persistence of their need for psychic satisfactions, in
this case religious and ornamental gratification, to be combined with
the more purely economic aspects of money, a combination lost by
having to rely exclusively on the narrower range of functions performed
by coins. Though mass-produced and imported like minted coins,
manillas and similar objects were nevertheless felt to be far more
adapted to the needs of primitive societies than were coins. The
manillas were virtually a modern metallic money integrated into
primitive societies to such a degree that they performed the functions
usually associated exclusively with primitive moneys.
The normal process of monetary development was of course just the
reverse, being a series of occasionally interrupted improvements which
cumulatively transform primitive communities through increasing
recourse to metals for all sorts of uses including money, into more
advanced economies, diffusing higher standards of living and more
sophisticated monetary and trading systems over wider and wider areas
and involving vastly greater populations. Money and civilization
usually marched onward together, and, occasionally, declined together.
Once it had become available, the increased preference for metallic
money is easily appreciated, for as Jevons has convincingly
demonstrated, it possessed, in the pre-electronic era, to a higher degree
than any other material, the essential qualities of a good money,
namely, cognizability, utility, portability, divisibility, indestructibility,
stability of value, and homogeneity (Jevons 1910, 31).
48
FROM PRIMITIVE AND ANCIENT MONEY
Although Jevons arranged these in a different order of priority, we
have already seen that what may be a correctly interpreted order for one
society may be quite misleading in another. Certainly with regard to the
development of coinage, cognizability would be placed among the first
ranks rather than in the last position to which Jevons relegated it. The
pace of financial bargaining was enormously speeded up when
recognized pieces of metal could be simply counted than when metals
had to be weighed, as was the case in all pre-coinage days in all
primitive societies and even for long periods in the earlier stages of
civilized communities. Admittedly the ancient world of the Near East
managed to carry out an extensive system of trading based very largely
on metallic currencies exchanged by weight without any knowledge of
coining. But that extensive degree of trading was possible only because
they had already 'invented' an effective system of banking.
Money and banking in Mesopotamia
Man may not have originated in the traditional site of the Garden of
Eden, to the east of the Holy Land, but more possibly in the Rift Valley
of Africa. Nevertheless, it may well be that myth and science can more
easily be reconciled in recognizing the probability that the world's first
civilization grew up in the warm, fertile, alluvial plains between the
Euphrates and the Tigris some seven thousand years ago and spread
gradually to neighbouring regions. It is equally probable that this
traditional Eden saw the first use of money, while over three thousand
years ago the world's first bankers were living in Babylon. Toynbee
isolates some twenty-one different 'civilizations' but, since fifteen of
these were directly or indirectly derived from earlier examples, he
narrows the separately developed into six: the Sumerian, Egyptian,
Minoan, Chinese, Mayan and Andean. Of these only the Incas of the
Andes had managed to achieve a high degree of civilization without the
use of money, though paradoxically they possessed a superabundance
of what has generally been regarded as by far the best material for
money - gold and silver.
As was explained in chapter 1, the greater the stratification of society
and the more efficiently meticulous the planning system, the less
necessary it is for people to use money. This may account for the fact
that whereas the Spanish conquistadores found that the more liberally
governed Mexicans regularly used gold dust (kept in transparent quills)
and cocoa-beans (kept for large payments in bags of 24,000) as money,
in contrast the more rigidly hierarchical Incas had no such money: an
exception proved by an iron rule. The origin of money in China
TO THE INVENTION OF COINAGE, 3000-600 BC
49
occurred quite independently of that elsewhere, but the relatively closer
proximity of the Sumerian, Egyptian and Minoan civilizations may still
raise some doubt as to the degree to which they were ignorant of each
other's monetary affairs, particularly since strong trading links are
known to have been established in quite early times.
The upsurge of interest in archaeology in recent years, combined
with the application of scientific methods such as dendro-chronology
and radiocarbon testing generally increased the confidence with which
historians of ancient times can establish the age of some of the past data
by which they trace the rise of civilization. Even with all these modern
aids however, there remain legitimate doubts concerning how to
interpret even the most cast-iron of facts. As Joan Oates disarmingly
concedes, 'Any study of Babylonian civilisation is, and will remain, an
amalgam of near-truths, misunderstandings and ignorance, but this can
be said of more periods of history than most historians would admit'
(1979, 197). However, so far as monetary studies are concerned we are
at least favoured by the exceptional durability of the precious metals
and, in the case of the Middle East, by the almost equal durability of
the innumerable clay writing tablets which form a vast reservoir of
usable information. Yet behaviour leaves no fossils, and even where
detailed written texts exist, their discovery by its very nature is apt to be
random. Of course there are exceptions, for when records are written in
tablets of stone, whether these are the biblical ten commandments or
the more numerous laws of Hammurabi, we may assume, from the form
and material in which they were written, that they were considered to
be of great importance in contemporary life, and our historical
treatment should take notice of such facts.
'Money,' said Keynes in his Treatise,
like certain other essential elements in civilisation, is a far more ancient
institution than we were taught to believe some few years ago. Its origins
are lost in the mists when the ice was melting, and may well stretch back
into the paradisaic intervals in human history of the inter-glacial periods,
when the weather was delightful and the mind free to be fertile of new ideas
- in the Islands of the Hesperides or Atlantis or some Eden of Central Asia.
(1930, 1, 13)
It was from this lost Eden that money and banking, as well as writing
and our duodecimal methods of counting time, space - and money -
originated. If one were to speculate as to how writing first appeared one
might dreamingly imagine that romantic necessity or poetic inspiration
were the causes rather than the prosaic need to record debts and credits,
which in historical reality turns out to have been the source.
50
FROM PRIMITIVE AND ANCIENT MONEY
Thus handwriting from its very beginnings was closely associated
with, and improved in parallel with, the keeping of accounts. The
earliest Sumerian numerical accounts consisted of a stroke for units and
a simple circular depression for tens. The economic origins of writing
are unequivocally confirmed by expert archaeologists. Thus Dr Oates
asserts that 'Writing was invented in Mesopotamia as a method of
book-keeping. The earliest known texts are lists of livestock and
agricultural equipment. These come from the city of Uruk c.3,100 bc'
Further to emphasize its mundane, economic character the same
authority adds that 'the invention of writing represented at first merely
a technical advance in economic administration' (Oates 1979, 15, 25).
Neighbouring tribes such as the Akkadians borrowed the Sumerian
system of handwriting and gradually this picture-writing or
pictographic script developed into various cuneiform standards that
lasted for three thousand years, and especially for certain economic
documents, well into the first century AD. Numerous records exist in
this script describing the activities of a number of banking houses and
of prosperous merchants in Babylon and Nippur after the region
became part of the Persian empire (Oates 1979, 136).
The royal palaces and especially the temples were the centre of
Babylonian economic and administrative as well as of political and
religious life (these elements were not as compartmentalized as we have
made them). Security for deposits was more easily assured in the
temples and royal palaces than in private houses, and so it was natural
enough that the first banking operations were carried out by royal and
temple officials. Grain was the main form of deposit at first, but in the
process of time other deposits were commonly taken: other crops, fruit,
cattle and agricultural implements, leading eventually and most
importantly to deposits of the precious metals. Receipts testifying to
these deposits gradually led to transfers to the order not only of the
depositors but also to a third party. 'This was the way in which loan
business originated and reached a high stage of development in
Babylonian civilisation' (Orsingher 1964, 1). In the course of time
private houses also began to carry on such deposit business and
probably grew to be of greater importance internally than was the case
in contemporary Egypt. The banking operations of the temple and
palace-based banks preceded coinage by well over a thousand years,
and so did private banking houses by some hundreds of years: notably
the reverse of later European monetary development.
Literally hundreds of thousands of cuneiform blocks have been
unearthed by archaeologists in the various city sites along the Tigris
and Euphrates, many of which were deposit receipts and monetary
TO THE INVENTION OF COINAGE, 3000-600 BC
51
contracts, confirming the existence of simple banking operations as
everyday affairs, common and widespread throughout Babylonia. The
Code of Hammurabi, law-giver of Babylon, who ruled from about 1792
to 1750 BC,3 gives us categorical evidence, available for our inspection in
the shape of inscriptions on a block of solid diorite standing over 7 ft
high now in the Paris Louvre, showing that by this period 'Bank
operations by temples and great landowners had become so numerous
and so important' that it was thought 'necessary to lay down standard
rules of procedure' (Orsingher, 1964, viii).
The oldest Babylonian private banking firms still remain anonym-
ous, but by the seventh century BC the 'Grandsons of Egibi' emerged
into recorded fame. Their headquarters were in the city of Babylon,
whence they carried out a very wide variety of business activities
combined with their banking. They acted as pawnbrokers - and in case
anyone objects that this is hardly banking, perhaps one should be
reminded that the original charter of the Bank of England empowered it
to act as a pawnbroker. The House of Egibi also gave loans against
securities, and accepted a wide range of deposits. 'Customers could
have current accounts with them and could withdraw the whole or
parts of certain deposits with cheques . . . The ships of the firm were
used in trade expeditions exactly like those of the royal and temple
households. Speculation and investment for secure income were
combined in the business pattern of this bank' (Heichelheim, 1958, I,
72). After having flourished for some hundreds of years this bank seems
to fade from the scene some time during the fifth century BC.
A similar but younger banking firm of which we have records is that
of the Sons of Maraschu, which operated from the town of Nippur. As
well as carrying on the same kind of banking functions as the
Grandsons of Egibi, they specialized in what we would call renting and
leasing arrangements. They administered, as agents or tax farmers, the
royal and larger private estates; they rented out fish-ponds, financed
and constructed irrigation canals and charged fees to farmers within
their water networks; and they even had a partial monopoly on the sale
and distribution of beer. They also acted as jewellers and goldsmiths.
Thus it is not surprising that in Babylon the use of precious metals, and
later coinage, became much more generally accepted than was the case
in Egypt and, because they had a less rigid and more 'mixed' economy,
the peculiar kind of state giro system based on grain did not reach so
'The dates suggested by Orsingher, 1728-1686, are probably too late; but as Dr Oates
warns: 'Chronological systems currently in use give a range of 200 years for the
accession of Hammurabi' (see Oates 1979, 24).
52
FROM PRIMITIVE AND ANCIENT MONEY
high a pitch of development in Babylon as it did in the Egypt of the
Ptolemies; to which account we now turn.
Girobanking in early Egypt
Nowhere has grain achieved such a high degree of monetary use as in
ancient Egypt. Although copper, gold and silver were long used as units
of account, there is some doubt as to the extent they were also used as
media of exchange, particularly for the majority of the population,
when the allocation or rationing of resources was based on a strict form
of feudalism which restricted the need to use money. Despite the
existence of metallic money, it was grain which formed the most
extensively used monetary medium, particularly for accounting
purposes, even after the Greeks had introduced coinage. The origin of
transfer payments to order developed naturally by stages, arising from
the centralization of grain harvest in state warehouses in both Babylon
and Egypt. Written orders for the withdrawal of separate lots of grain
by owners whose crops had been deposited there for safety and
convenience, or which had been compulsorily deposited to the credit of
the king, soon became used as a more general method of payment for
debts to other persons, the tax gatherers, priests or traders. Despite the
other forms of money, such as copper rings which had been in use from
time to time and from place to place, there was an impressive
permanency and generality about the use of grain as money, especially
for large payments, in ancient Egypt. This system of warehouse
banking reached its highest peak of excellence and geographical extent
in the Egyptian empire of the Ptolemies (323-30 bc). Private banks and
royal banks using money in the form of coins and precious metals had
by then long been known and existed side by side with the grain banks,
but the former banks were used chiefly in connection with the trade of
the richer merchants and particularly for external trade. Obviously,
anything in strong demand by the state, the value and condition of
which were carefully measured and guaranteed by a well-trained, and
largely Greek, bureaucracy, became almost universally accepted in
payment of debt. Long-established private merchant banks were almost
entirely foreign and dominated in particular by the Greeks.
There was a wide gap between this smoothly working system and the
monetary habits of the native Egyptian population. The native
Egyptian's reluctance to accept metallic money probably suited the
Ptolemies' economic strategy very well. They seemed to be forever short
of the precious metals which were indispensable for foreign purchases
and especially for external military expenditures, for which purpose
TO THE INVENTION OF COINAGE, 3000-600 BC
53
they were forced to drain Egypt internally of its precious metals (very
much as the internal gold coinage of Europe disappeared to meet the
demands of the First World War). Yet the Ptolemies wished to stimulate
economic activity within Egypt and were fully aware that this would
require more rather than less money. If they were short of monetary
metal, which not only appeared too precious to be used widely for
internal monetary use, but which in any case was not very popular with
the natives, there was of course an abundance of grain — and grain had
for centuries possessed a quasi-monetary character in Egypt. If the
Greek expertise in banking could be adapted by the Egyptian
bureaucracy to the peculiar preferences and habits of the indigenous
population, then the Ptolemies would have the best of both worlds. This
they did. Thus it was partly in order to economize on internal coinage
that much greater use was made internally of grain for monetary
purposes: and this meant a much fuller development of the system of
warehouse banking and grain transfers than had ever been previously
achieved anywhere. Consequently, although some rudimentary
elements of a giro system of payment had developed much earlier in
Babylon and Greece than in Ptolemaic Egypt, undoubtedly the honour
for the first full and efficient operation of that most important financial
innovation that enabled a nationwide circulation and transfer of credit
belongs to the Egypt of the Ptolemies.
We have seen that most of the external and some of the internal trade
of Egypt was carried on with the aid of Greek and other foreign
bankers. It was with their aid that the Ptolemies transformed a
scattered local warehouse deposit system into a fully integrated state
giro of such a high standard of efficiency and sophistication as to be
almost beyond credence by modern man, who too readily assumes that
the use of grain as money must necessarily imply a primitive economic
system. It is perhaps for this reason that Preisigke, one of the most
authoritative writers on banking developments in the ancient world, in
his Giro System in Hellenistic Egypt (1910) emphasizes its modernistic
aspects. Rostovtzeff, another eminent Egyptologist, in his monumental
study of The Social and Economic History of the Hellenistic World
(1941) gives conclusive evidence that by means of the grain banks, the
banking habit had been greatly extended in Egypt: 'The accounts of the
bank are especially interesting because they show how popular recourse
to the banks became with the people of Egypt . . . the system of paying
one's debts through the bank had the additional advantage of officially
recording the transactions and thus providing important evidence in
case of litigation', and of course greatly assisted the state in matters of
economic and fiscal control.
54
FROM PRIMITIVE AND ANCIENT MONEY
Rostovtzeff explains in considerable detail the accounting system of the
private and royal grain banks, in order to make it crystal clear that 'the
payments were effected by transfer from one account to another without
money passing' (1941, 1285). Double-entry bookeeping had of course not
yet appeared, but a system of debit and credit entries and credit transfers
was recorded by varying the case endings of the names involved, credit
entries being naturally enough in the genitive or possessive case and debit
entries in the dative case. As already stated, Rostovtzeff found it necessary
to mention 'this detail in the bank procedure, familiar in modern times,
because many eminent scholars have thought it improbable that such
transfers were made in ancient times' (1941, 1285). The numerous
scattered government granaries were transformed by the Ptolemies into a
network of corn banks with what amounted to a central bank in
Alexandria, where the main accounts from all the state granary banks
were recorded. The separate crops of grain harvested by the farmers were
not separately earmarked, but amalgamated into general deposits, except
that the harvests for separate years, and therefore of different qualities,
were stored in separate compartments (Preisigke 1910, 69).
Seed corn, the capital base both of the economy and of the banking
system, was directly under the control of the state by means of an
official appropriately termed the Oeconomus, whose duty it was to see
that seed corn would not be used for any other purpose. Vagaries of the
weather, though on occasions disastrous, were of course much less of a
hazard in the Nile Delta than with us: so that inflation or deflation
could to some extent be controlled and the monetary scarcity of one
year be compensated by the bounty of the next. Thus the giro system in
Egypt had come about because of the need to economize on coins and
the precious metals, by the need to supplement the existing private
banks with a state bank system, and above all by the desire to spread
the banking habit throughout the community. It also gave to the rulers a
closer control over the economy for fiscal purposes, while providing a
general stimulus for trade more widespread than had previously been
possible, particularly among the poorer classes. In the new economic
organization of the Ptolemies 'two systems were . . . blended, so as to
form one well-balanced and smoothly working whole: the immemorial
practice of Egypt and the methods of the Greek State and the Greek
private household' (Rostovtzeff 1941, 1286). Grain may have been
primitive money - but the world's first giro system transformed it into
an efficient medium of payments partaking of many of the most
desirable features of modern money.
The precise nature and extent of banking activity in the ancient
world is likely to remain an uncertain matter, about which it would be
TO THE INVENTION OF COINAGE, 3000-600 BC
55
unwise to be too dogmatic. Heichelheim has listed a number of distinct
banking services such as deposit banking, 'foreign exchange', giro,
secured and unsecured lending not only internally but also externally,
and is satisfied that 'almost all these forms of banking business existed
already as early as the third millennium BC . . . we have unmistakably
clear records of such transactions between Babylonians, Assyrians and
other nations of Asia Minor' (1958, II, 134). He goes on to show that
'incasso' or the taking in and paying out of money on behalf of
customers' orders was part of the normal economic activity of the royal
and temple store houses, to a more marked degree in Egypt than even in
Babylon.
We can see what a great part this banking system must have played over the
whole of this vast country, and how detailed was its organisation, by the
number of its branches and employees and by the daily records and
accounts kept of the capital invested in them, so that these may well
compare with the greatest banks of the nineteenth and twentieth centuries
ad. (Heichelheim, 1958, III, 122)
To what extent, one wonders, are such comparisons between ancient
and modern times valid?
Coin and cash in early China
Chinese civilization has enjoyed the longest history and has, at least
until the present century, directly involved far more people than any
other. Yet for a number of reasons it is very largely ignored by western
writers,4 partly from a contagious ignorance, but mainly because our
modern western civilization has been largely derived from Roman and
Greek sources which in their turn learned much from Mesopotamia and
Egypt but nothing directly from China itself; from which, with a very
few notable exceptions, the West was cut off until the geographical
discoveries of the sixteenth and later centuries. Consequently the debt
which western money owes to Chinese development is small (with the
possible exception of the banknote), since the route to modern money
follows the general course of Hellenistic and Romanized western
civilization. Nevertheless while obviously being unable to do justice in
the space of a few pages to such a vast subject, there are a few salient
features of Chinese monetary development which repay even the most
cursory examination.
4 Thus Lord Clark's Civilisation (1969), the text of the successful television series,
completely ignores China.
56
FROM PRIMITIVE AND ANCIENT MONEY
We have already noted how metal cowries, of bronze or copper, were
cast in China as symbols of objects already long accepted as money. A
similar process took place with regard to spades, hoes and adzes
(variants of the most common tools) and also of knives. The common
characteristic of all these metallic moneys was not only that they were
cast but that they were almost invariably composed of base metals.
Another important aspect of most of the popular Chinese moneys was
that they had holes in them, either at one end, as with the cowrie and
knife currency, or in the centre, as obviously with ring-money and, later,
the conventional coin currencies. The holes which were mostly square,
but not uncommonly circular, served two main purposes. First, in the
process of manufacture, a rod would be inserted through a number of
coins which could then have their rough edges filed or be otherwise
finished in a group of fifty or more coins together. Secondly, when in
use, they could be strung together in large quantities for convenience of
carriage and of trading. This leads us to another vital feature of
Chinese coins namely that because they were made of base metals they
had a low value density, and therefore it was all the more necessary to
handle them in very considerable quantities even for items of relatively
moderate value.
In contrast to the development of coinage in and around the
Mediterranean where the precious metals held the most important role,
China concentrated almost exclusively on base metals for coinage, with
important consequences for the differential development of money in
the eastern and western worlds. In China, too, the state played a
dominant role in coinage, and although there were hundreds of mints,
the state insisted on central control and uniformity of standards. A
further consequence of the base-metal composition was the ease with
which such coins could be imitated and counterfeited. The raw material
costs were low, the method of manufacture was simple and the
superficial inscriptions easy to apply. Consequently imitation was
endemic particularly at the periphery of the authorities' power. Because
coins were confined to base metals the precious metals generally had to
be used for all large purchases and had to be weighed in the primitive
fashion even in modern times rather than counted, as with coins.
Consequently, although China was easily the first to introduce 'coins',
the possibilities which they offered were not as fully exploited as in the
western world, where, once invented, their development went ahead
much more quickly.
The question of when coins were 'invented' depends very largely on
one's definition of a coin, and one must concede that a definition which
might suit the numismatist, who might legitimately be rather more
TO THE INVENTION OF COINAGE, 3000-600 BC
57
concerned with technical considerations than the economist, might not
quite suit the latter who is, or should be, much more concerned with
function than with form or technique. Functionally speaking, the early
spade, hoe and knife currencies were 'coins'; they were state-
authenticated, more or less identical, and guaranteed symbols of value,
accepted by tale not by weight, with their authorization clearly
indicated by the inscriptions they carried. Although the experts differ as
to the earliest dates to be ascribed to these tool-coins, they probably
were in general use at the end of the second millennium BC, while round
coins were, according to recent research, at least roughly contemp-
oraneous with those of the eastern Mediterranean, though earlier
writers would date Chinese round coins very much earlier, in the
twelfth century bc.^ Part of the difficulty in being as precise in dating
Chinese coins compared with others is the fact that Chinese emperors
would not allow their names or heads to appears on their coins, so that
sequential series are difficult to establish. One may summarize the
difference between Chinese and western coinage by saying that, as in so
many other aspects of civilization, China had a long lead; but in the
case of coinage this lead was quickly overtaken when, quite
independently, a different type of coinage was invented elsewhere, using
superior techniques and precious metals, which were much better for
most monetary functions.
Ever since the Portuguese opened the sea route to China round the
Cape of Good Hope the typical, small, mainly base-metal coins of
China have been known as cash, an extension geographically and
linguistically of the Tamil word for such money. This cash was virtually
the same as that circulating in ancient China: numismatically speaking,
time had stood still. The enormous difference in values between the
large gold coins favoured in the rest of the world for larger payments
and the small stringed 'cash', typically consisting of a thousand coins,
may be seen by the average ratio between them of a thousand to one.
Thus although China can boast a 'coinage' of unbroken continuity
going back almost three thousand years, this longevity rested on a rigid
conservatism which confined coins to act only as the small change of
the economy, a position similar to that occupied by coins in our own
society today where precious metal coins, for currency purposes, have
disappeared.
It is a remarkable fact that China did not issue any substantial
precious metal coinage, and then only in silver, until 1890, and even
5 Contrast J. H. S. Lockhart Collection of Chinese Copper Coins (1907) with J. Cribb
'The Far East' in Coins ed. M. J. Price (1980).
58
FROM PRIMITIVE AND ANCIENT MONEY
then the minting of traditional cash continued until 1912 (Cribb 1979,
184). The arrested, or at least limited, development of coinage in China
was however in large part responsible for stimulating the growth of a
powerful substitute for money — the banknote in modern form — some
five hundred years before similar developments took place in Europe.
Conversely the greater value-to-weight ratio of the superior western
coinage probably inhibited the development of the banknote in Europe;
a classic historical example of good money being an enemy of the best.
It is appropriate now to consider the origin and early development of
this superior form of coinage.
Coinage and the change from primitive to modern economies
Although one cannot draw a clear line separating the untidily
overlapping types of 'primitive economies' from more modernistic
types, one can certainly affirm that in no instance has this momentous
process of change been more exhaustively studied than in the case of
early Greek history. One might add also that the rapid development, if
not quite the original invention, of coinage of a modern type appears to
have been an essential, if possibly almost accidental, catalyst in the
astonishing development of Greek civilization. Both economics and
numismatics, linguistically and more generally speaking, come from the
Greek, originally meaning household management and custom or
currency respectively, though both these terms naturally had rather
different connotations then than now.
We have earlier seen numismatics described, by Knapp, as the 'dead
body' of the dismal science. Nothing could be further from the truth.
There must be something about money which generally stirs the blood
and occasionally the mind, for in recent years the 'science' of
numismatics has been in the sort of uproar that has long distinguished
the protagonists of the various schools of monetary economists. It was,
most appropriately, the matter of how to interpret the history of the
classical Greeks, probably the most exciting but possibly also the most
bellicose of people, that became the occasion for open verbal warfare
between the various schools of thought. Was the Greek economy
'modern' or was it 'primitive'? In principle the conflict was not confined
to Greece, for it covered the general interface between primitive and
modern societies; but it became focused more sharply on the Greek
economy in general and Greek coinage in particular than has been the
case elsewhere.
Does the introduction of coinage mark a watershed in human
progress, or is it simply a minor technical improvement in political
TO THE INVENTION OF COINAGE, 3000-600 BC
59
accountancy and in methods of exchange? Is the invention of money
not only accidental but also incidental, not only to the development of
Greek civilization in particular but also to other civilizations? What
were the causes of this invention, or in other words what were the
origins of coinage? In particular it is important to realize that current
debates among historians regarding the degree to which non-economic
factors, mainly political, as opposed to economic factors, mainly trade,
were responsible for the introduction of coinage are precisely the same
kind of debates which arose in the past and still arise as to the origins of
primitive money. Indeed, in the form 'how is money created today' this
perennial argument still proceeds. It is in the nature of money to give
rise to these polarized attitudes, and it is this that gives an added
dimension to the intrinsically interesting history of the origins of
coinage.
This problem of the degree of modernity of Greece and especially of
its 'economy' (as a sort of theoretical average of the distinctly different
city-states) thus brought into sharp relief the misleading
oversimplifications of the early school of mainly German economic
historians such as Hildebrand, Bucher and Beloch, who saw the past in
terms of a logically neat economic model consisting of a few definite
stages through which each civilization had inevitably to pass. Given this
model, or some variant modified to suit the purpose in hand, it became
customary to make a wide and apparently meaningful series of heroic
comparisons between different civilizations at the same 'stage' of
development, with the division between primitive and modern being
marked by the rise of a money economy. Greek development, for
example, from the seventh to fifth centuries BC could thus be seen to
correspond closely in its nature and almost even in the speed of its
growth with that of modern Europe during the course of the fourteenth
to sixteenth centuries inclusive. The very extremes to which these views
were pressed inevitably created a strong reaction, also led appropriately
by German writers such as the sociologist Max Weber and especially
the economic historian Johannes Hasebroek, who emphasized the
differences rather than the similarities between ancient Greece and
modern Europe. Hasebroek demonstrated how elementary were Greek
industrial techniques, how limited in scale and nature was their trade,
and above all he showed the fundamental errors of attributing modern
concepts of national economic policy, such as mercantilism, money
markets or labour markets to the city-states of ancient Greece
(Hasebroek 1928).
Certainly the Greeks liked to display a distinctly different, even
apparently hostile, attitude towards trade and commerce from that
60
FROM PRIMITIVE AND ANCIENT MONEY
which exists today. Partly because of their slaves but perhaps also
because of their nature, they publicly pretended to disdain business
affairs. As in all pre-industrial societies agriculture was the main
occupation and landownership the basis of society. In general, trading
was the business of foreigners, the 'metics' who were not normally
allowed to own land or receive the privilege of citizenship. Most
manufacturing (with a few notable exceptions which have been
overemphasized by the modernists) was on a very small scale, hardly
more than cottage industry or handicraft activity carried on either in
the open or in small workshops. Given these attitudes, it would clearly
be wrong to assume that the city-states pursued consistent 'economic'
policies, whether 'mercantilist' or 'free-trade' such as those appropriate
to seventeenth- or nineteenth-century Europe. Nevertheless when due
allowance has been made for the typically small-scale and locally
confined nature of most Greek business, economic activities were
crucially important to their development, and their monetary
innovations were essential stimulants in this process. An authoritative
assessment by Antony Andrewes, professor of ancient history at
Oxford, gives the following balanced picture: 'Commerce and industry
in ancient Greece were exceedingly important, but the individual
operations were on a very small scale.' He also warned that 'although it
is salutary to insist that the standard categories of nineteenth-century
economics are not applicable, the reaction may go too far, eliminating
the effect of trade on Greek history altogether (Andrewes 1967, 119,
145).
Nevertheless the primitivist view, magisterially reaffirmed by Moses
Finley, professor of ancient history at Cambridge (1975), and his
numerous disciples, continues to claim considerable support, despite
the accumulation of more recent 'modernistic' evidence, such as that
provided for example by Austin, Vidal-Naquet and Oswyn Murray. The
last, after examining the degree to which foreign trade and early
coinage were mutual stimulants, concluded: 'I am not convinced that
trade plays as little part in the early use of coinage as most modern
scholars (i.e. the primitivists) believe' (Murray 1980, 225). Although the
balance of argument is thus beginning to veer away from the
primitivists, one of the important permanent benefits of their
scholarship has been to demonstrate conclusively that in general the
'economy' was inseparable from the body politic and in particular that
the drive which pushed the Greeks into predominance as coin-makers
came very largely from non-economic motives and not simply from
commercial considerations.
Whereas earlier modernistic writers confined their attention too
TO THE INVENTION OF COINAGE, 3000-600 BC
61
narrowly to the economic factors which gave rise to coinage and
overemphasized the degree to which the 'economy' of Greece could be
compared with that of modern countries, most recent writers have
taken note of these other important features affecting Greek monetary
history. Thus Austin and Vidal-Naquet give as much prominence to the
politics as to the economics of money: 'In the history of Greek cities
coinage was always first and foremost a civic emblem. To strike coins
with the badge of the city was to proclaim one's political independence'
(Austin and Vidal-Naquet, 1977, 57). One might perhaps add, despite
the warnings of the primitivists, that this political badge of
independence conferred by striking their own coins is not dissimilar in
concept to the fashion of newly independent ex-colonial states, most of
them with a recent history of primitive money, insisting on setting up
their own central banks in this century in an attempt to proclaim to the
world both their political and their economic independence. Had the
ex-colonialist officials been more conversant with the history of
primitive and ancient money they would have welcomed and modified
rather than have impotently resisted such changes.
Although the primitivists may well be blamed for their overcautious
refusal to make or condone what others would see as useful and indeed
essential intertemporal generalizations, they have at least correctly
insisted on the important part played by non-commercial
considerations in the origins and growth of coinage. Thus, although
they themselves might hesitate to do so, the implied comparisons with
the non-economic aspects of primitive and even modern moneys still
need to be more explicitly, clearly, consistently and emphatically
repeated.
The invention of coinage in Lydia and Ionian Greece
Turning now to the question as to how, when and where non-Chinese
coinage was first 'invented', it should be made clear that the innovative
road was a long one, involving many intermediate stages though the
final stages took less time than had previously been thought. Whereas
the production of roughly similar metal ingots, so long as these gave no
authentic indication of their weight or purity, can be definitely
excluded, yet, when their weight and purity became authenticated to
such a degree that they were accepted fairly generally without having of
necessity to be weighed, then we may take this as being the first step
towards coinage - but still a long way from the final product. Such a
preliminary stage was reached in Cappadocia, where the state
guarantee, probably both of the weight and purity of her silver ingots,
62
FROM PRIMITIVE AND ANCIENT MONEY
helped their acceptance as money; a position reached as early as
between about 2250 and 2150 BC. As the rather cumbersome ingots
gradually became conveniently smaller, they were fashioned into a
number of different forms of more standardized monetary objects, such
as bars, which in their turn were reduced to rods, spits and elongated
nails.
The most obvious and direct route to coinage was however through
the improvement in quality and authority of the kind of large silver
blobs or 'dumps' such as those in use in Knossos in the second
millennium. These Minoan pre-coins were however not very uniform
and required either a state seal or a punched impression to help their
still hesitant circulation. However such metal quasi-coins gradually
became more plentiful in Greece, including the Greek islands and the
eastern Mediterranean, during the first half of the first millennium BC,
during which the final stages in the inventive process took place quite
rapidly. In retrospect we can see that this invention meant that a new
monetary era had definitely begun, of a form and nature that by today
has penetrated virtually the whole world, and even ousted, in the latter
part of the nineteenth century, its ancient Chinese rival.
Both Lydia and the mainland portion of Ionia, the birthplace and
nursery respectively of coinage, formed parts of what is now Turkey,
Lydia lying along its southern and Ionia along its south-western coasts.
Though separated by 400 miles of mountainous terrain they were fairly
close neighbours by sea. During the seventh century BC their rulers
became united by marriage, and Lydia, under its mythical Midas, its
semi-legendary Gyges and their equally but verifiably rich and restless
successors, aggressively sought to exert sovereignty over the Greek city-
states of mainland Ionia and some of the Greek islands. Croesus
succeeded in annexing Phrygia until he in turn was conquered by the
Persians in 546 BC.
It was during this period that the final stages in the inventive process
of modern-type coinage were completed, although the actual steps in
this process remain matters of active debate among the experts. Both
Lydia and Ionia had a hand in these developments but with priority
going definitely but narrowly (more narrowly, it now seems as the result
of recent research, than was formerly believed) to Lydia. The rivers of
this region rush down from the mountains and then, typified by the
River Maiandros, silt up as they 'meander' over their plains. It was from
'panning' in these rivers that the Lydians and Ionians derived their
special type of light-yellow precious metal, a natural amalgam of gold
and silver, which the Lydians probably fashioned into the world's first
struck or hammered coins. According to Greek legend the rich deposits
TO THE INVENTION OF COINAGE, 3000-600 BC
63
of the Pactolus river near Sardis, the Lydian capital, were the result of
Midas' bathing in its torrents to wash away his dangerously
embarrassing golden touch which had even turned his food into gold.
This Lydian metal was called 'electrum' because of its amber-like
appearance (it was the electro-magnetic attraction of amber that was
the common test for distinguishing precious amber from worthless
beads). As the Lydians' metallurgical skill improved, they learned how
to separate the gold from the silver and so from both separate and
mixed ore-sources, began issuing separate gold and silver coins.
Croesus in the mid-sixth century BC is thus credited with the first
bimetallic coinage, the manufacture of which began thereafter to be still
further improved.
At the beginning of the seventh century BC it would be stretching the
imagination to call the early Lydian dumps of electrum 'coins': well
before the century closed they can be clearly recognized as coins. At
first the bean-shaped dumps (possibly reminiscent of cowries), were
heavy, cumbersome, irregular in size and unstamped. They were then
punch-marked on one side and rather lightly inscribed on the other.
Such inscriptions were at first hardly more than scratches, and probably
meant more as a guarantee of purity rather than of weight, although as
they became more regular in form and weight the official authen-
tication was taken to guarantee both purity and weight. All these stages
were quickly carried through until, some time in the second half of the
seventh century, they had undoubtedly become coins, rounded, stamped
with fairly deep indentations on both sides, one of which would portray
the lion's head, symbol of the ruling Mermnad dynasty of Lydia.
It was not unusual for some of the earlier coins to carry a number of
punch-marks, made it is thought by well-known merchants some
distance from the Lydian city-states as a local reassurance regarding the
quality of the money. With due allowance for the difference in cultures,
the concept of such stamping was not unlike the 'acceptance' of bills of
exchange by merchant bankers in modern times to increase their
currency and liquidity. The Lydians were great traders, as were the
Ionians. Indeed Greek traders had considerable influence in Lydia and
on their way of life and of making a living for themselves; that is
because what we would call their 'economies' were basically similar. It
is little wonder therefore that the Lydian idea of coinage was so readily
taken up by Ionia and passed quickly westwards over the other Greek
islands to mainland Greece. It was this rapid series of improvements in
the quality of coinage that enables us to credit Lydia, and shortly
thereafter Ionia, as being the true first inventors of coins,
numismatically speaking; even if from the wider, economic point of
64
FROM PRIMITIVE AND ANCIENT MONEY
view, where greater emphasis must be given to function rather than to
form, the Chinese quasi-coins have a longer history. In quality, range of
functions and influence over the rest of the world, however, the
Lydian— Greek coinage has undoubted priority.
The chronology of Lydian and early Greek coinage has undergone a
thorough revision in the last few decades, the result of which has been
not only to establish a new general consensus but also to bring forward,
closer to today, by a century or more the timing of the various stages
which had previously been accepted, though with growing reluctance.
Thus Milne in his influential Greek Coinage published in 1931, thought
that 'there can be little doubt that before 700 the Ionians possessed a
plentiful and systemized coinage', and considered it 'reasonable to
suppose that the first coins [in Greece itself] were struck about or soon
after 750 bc' (1931, 7, 16). It is an occupational hazard of archaeologists
in general and numismatists in particular to be at the mercy of the latest
pick, spade or metal-detector, and as further evidence of Greek coinage
accumulated so the doubts about the previously accepted dating
multiplied. The economic history of money, even in its simplest and
most concrete form of coinage, is still not an exact study, despite its
recent scientific accoutrements. What has led, however, to the current
strongly held agreement was a particularly important series of findings
in 1951 under the ruins of the temple of Artemis (whom the Romans
later called Diana) which we know was built around 600 BC at Ephesus,
perhaps the most important centre of the ancient Ionian mainland.
The whole series of changes, from unstamped dumps, dumps
punched on one side only, and so on to proper double-struck coins with
the lion head device, badge of the royal house of Lydia, were found
together in this important hoard, which included not only some ninety-
two electrum coins but also a vast quantity of jewellery and precious
metal statuettes, some three thousand items in all. Among the many
results derived from this crucial find and corroborated by others are
that the first true coins date from around 640 to 630 BC. Thus the
literary tradition derived from Herodotus and Aristotle, which gave the
old conventional date of 687 BC for the earliest Lydian semi-coins, is
nearer the mark than was previously supposed. Herodotus remarked
most disparagingly on the gross commercialism of the Lydians, for not
only were they the first to coin money, but they also sold their daughters
into prostitution and were the first people to open permanent retail
shops - the latter said in the same vein as Napoleon's castigation of the
English as a nation of shopkeepers. The Artemisian find clearly
confirms the literary tradition of Lydian precedence in coinage since the
Lydian coins show all the earlier stages, whereas the Greek coins, being
TO THE INVENTION OF COINAGE, 3000-600 BC
65
all proper coins, are consequently confidently considered to be derived
from and direct copies of the Lydian finished product. The other early
Greek coinages have therefore been revised downwards. Thus instead of
the '750 bc' suggested by Milne for the coinage of Aegina we now read
595 BC, with the Athenian around 575 BC and the Corinthian around
570 BC. This change in chronology accelerates the speed of change and
the degree of success achieved by Greek money in the relatively short
period of a few centuries following the Lydian invention of proper
coins. This perceptive recent eulogy captures the spirit of this
achievement: 'The extraordinary characteristic of Greek coinage is the
speed with which it developed from the primitive level ... to become a
perfect, if minor, art-form. By 550 BC the techniques were still primitive
. . . The fifth century saw the minting of the most beautiful coins ever
made' (Porteous 1980). The important researches of Porteous, M. J.
Price (1980) and E. S. G. Robinson (1956) have done much to clarify the
previously misty chronology of early coinage.
Since the time of this mainly Greek invention the financial history of
the world has undergone a series of revolutionary changes around the
central, relatively unchanging core of coinage; for subsequently, to most
people most of the time, money has simply meant coins. In the western
world for two thousand years since coinage was invented, the
relationship between bullion and coinage has been the foundation of
private and public finance. Until recent times coins have continuously
been the main, though never the only, monetary medium; and although
there have been units of account for which no coins existed, these units
of account always stood in a known and definite relationship to the
existing coins. Money has always meant more than simply coins; but it
was coins that thereafter in the main constituted money and also
provided a simple and therefore universally understood and accepted
base and reference point for all other financial accounting devices and
exchanging media. It is this central characteristic of coinage which
illuminates the hidden importance of its discovery, for, through the
Greeks, the Lydians have given the Midas touch to economic history.
Subsequently economic history without coin-centred money is largely
meaningless. We have now to trace the steps by which this exciting
essentially Greek concept of money has spread far and wide, east to the
Indus, west to Spain, south to Upper Egypt and, finally the route of
most direct interest to us, northerly into western Europe and Britain,
thence to be re-exported worldwide.
3
The Development of Greek and
Roman Money, 600 bc-ad 410
The widening circulation of coins
From its birthplace in Lydia and Ionia the knowledge and use of coins
spread rapidly east into the Persian empire and west through the rest of
the Ionian and Aegean islands to mainland Greece, and then to its
western colonies, especially Sicily. It also spread northward to
Macedonia, Thrace and the Black Sea, but it was only partially, reluct-
antly and belatedly accepted in Egypt. Mainland Italy also was at first
rather slow in accepting the Greek financial innovations, in contrast to
the speed with which they were adopted by Sicily. Apart from these two
limited exceptions of mainland Italy and Lower Egypt, the use of
coinage spread rapidly around the countries bordering the central and
eastern Mediterranean and over the widespread and growing Persian
empire through Mesopotamia into India. There is some doubt whether
India had itself by this time developed an embryo coinage system quite
independently of that in China or Lydia. Whether or not it had itself
independently 'invented' coinage, the increasingly close contacts
between India and the Near East soon meant in practice that Indian
coinage became an adaptation of the Lydian/Greek invention via first
the Persian and later the Macedonian empire. For those reasons the
direct influence of any alleged indigenous Indian invention of coinage
was small compared with the overwhelmingly greater importance of the
indubitably independent inventions of coinage in China to the east and
even more, the Lydian-Greek developments to the west. The rapid east-
ward spread of coins from Lydia was not so much because of Lydian
traders going east but rather a case of the spoils of war through the
Persians moving quickly west. As we have seen, Croesus was himself
THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
67
captured in 546 BC during the westward drive of the Persian armies, a
drive that was to continue across the Greek islands and the Bosporus,
and so gravely threaten the rise of Greek civilization to its zenith, to
what in some ways has been the finest hour in the history of man. The
birth and rapid growth of coinage played a significant part in this story:
how significant is still a matter of exciting dispute.
As it happened there was a basic distinction between the development
of coinage east and west of Ionia. To the Greeks, coins were to be minted
almost exclusively in silver, with other metals, including gold being of
no great importance. On the other hand, the Persians and others to the
east of Ionia, showed a very strong and continuing preference, like the
Lydians themselves from whom they directly derived their views, for
gold. Silver was a subsidiary. In effect the bimetallic influence of
Croesus, with gold being paramount, continued in the Persian empire.
An interesting administrative division gradually developed, which meant
that the minting of gold coins was the jealously guarded sole right of the
Persian emperor, whereas silver coinage, being very much a subsidiary,
was from time to time delegated to the satraps and minor rulers of the
Persian kingdom. The period from the middle of the sixth century BC to
the death of Alexander in 323 BC saw the world's first great intermixing
of eastern and western cultures, a process inescapably involving
fundamental changes in the nature and extent of money and banking.
The choice of which metal to use for this powerful new economic and
political tool depended on a mixture of changing factors, among which
initially the availability of the raw materials was obviously the most
important. The availability of ores could not however be divorced from
increasing metallurgical skills and also the availability of labour,
preferably cheap labour, to mine, process and transport the ores. Long
before coins were invented, the monetary role of the precious metals
made them eagerly coveted, an elemental desirability which was greatly
increased as the political importance of coinage began to be more fully
appreciated, particularly when the minting of coins and their more or
less enforced distribution added a new dimension to the political and
military rivalry of that warlike age. In coinage as in other matters the
Greek city-states strove desperately for predominance, as did their arch-
rivals the Persian emperors. Among the earliest and most popular of
Persian coinages were the series known as 'archers' because on the
obverse they depicted the emperor armed with spear, bow and arrows.
The pre-Danish, Danegeld mentality of the Persian kings is captured in
their threatening boast, 'I will conquer Greece with my archers'; a vivid
illustration of contemporary views concerning the political power of
coinage, to buy allies and to buy off potential enemies.
68
THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
Conquest, taxes, tribute, offerings to the temples and to the gods, gift
exchange and finally trade; all these were methods of gaining precious
metals in amounts sufficient to establish and maintain mints. As with
the origins of money itself the economic cause of the spread in the use
of coinage was therefore only one, and at first probably only a relatively
minor one, of the many causes of the rise of rival coinage systems and
of the spread of coinage over the civilized world. In course of time the
influence of trade as a factor leading to the flow of specie and coin grew
to be much more significant, even if some of the more extreme
'primitivist' historians still like to denigrate the economic factors in the
rise and spread of coinage.
Laurion silver and Athenian coinage
If we match up the factors favourable to minting with the actual situ-
ation existing in Greece during the sixth to fourth centuries BC we may
readily see the reasons for the rise of Athens in particular to financial
prominence, its splendid coinage mostly reflecting but at least partially
assisting its rise to fame. We have already seen how the natural deposits
of electrum helped to give rise to Lydian and Ionian currencies, and
how those states soon learned to separate the gold from the silver.
Freely occurring silver deposits of any size were rare in Europe, being
known only in Tartessus in Spain and in the Alps. Before the sixth
century pure silver was known to occur only in two quite small mines in
Greece and one in Macedonia, and consequently the ratio of silver to
gold was much more favourable to silver than was the case after the
Greeks learned how their new sources could be exploited. In ancient
Egypt silver had in fact actually been more valuable than gold. The
changing relationships between gold and silver have bedevilled mon-
etary history from the beginning of time right up to the bimetallist
controversies in USA and Europe towards the end of the nineteenth
century.
At first the potentially plentiful supplies of silver were technically
inseparable from their argentiferous lead ores and therefore could not
be exploited. Luckily for the Greeks, necessity appeared to mother the
invention of new processes, enabling them to unlock vast reserves of
silver on their own doorsteps. 'It is very probable that technological
improvements resulted in the increased exploitation in silver-bearing
lead ores in mining areas such as Laurion near Athens and in
Macedonia and the Greek Islands; and this new availability of silver led
to the striking of coinage throughout Greek lands' (M. J. Price 1980,
27). The close connections between coinage and economic development
THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
69
is indicated by Professor Michell who believed that 'It was no accident
that the invention of metal coinage was made in the seventh century
when industry and commerce were fast advancing', (1957, 313), and he
might have added, the necessary technical skills kept pace with this
growth.
Cheap labour meant slaves, mostly working in domestic service and
on the land but also used in 'manufacturing' and especially employed in
great concentrations in the mining industry. The real cost of slaves, that
is their annualized capital costs plus their operational costs, had to be
balanced against the value of their output. Of course the jargon of
equating real marginal costs with the value of marginal output, or of
reckoning sunk capital costs against the realizable sales value of the
human capital involved - all this would have been as nonsensically
unintelligible in those terms in ancient Greece as it is Greek to the
majority of small-scale bosses today. But there can be little doubt that
such economic factors inescapably determined the real 'surplus' or
'profits' available to the employer in ancient Greece as in modern small-
scale industrial or mining activity. Despite the aristocratic denigration
of manual labour there was a limit to which slaves could be used as
substitutes for voluntary paid labour by the Greeks themselves: 'and so
the great majority of the Greeks both in classical and Hellenistic times
worked just as hard as anybody else in any time or country' (Michell
1957, 15). Socrates' father was a mason, Demosthenes' father a
manufacturer of armour, while Aristotle married the daughter of a
banker, Hermias (who was crucified by the Persians). Among the
majority of artisans in the Athenian Assembly were blacksmiths,
carpenters, farmers, fullers, merchants, shoemakers and shopkeepers:
after all had not Solon at the beginning of the sixth century decreed
that all fathers should teach their sons a craft? As Michell shows, the
prejudice against manual labour was a comparatively late development
in Greece, though once established, it persisted through Hellenistic into
Roman times. St Paul, free-born, highly educated, a citizen of no mean
city, was still, as a tent-maker, very sensitive about this strong prejudice:
'We labour, working with our hands, being reviled' (1 Corinthians
4.12). It is also commonplace but none the less true to observe that
Plato's Republicans essentially based on an economic interpretation of
history, which at least reflected the importance to contemporary
classical Greek society of being able to enjoy the leisure necessary for a
cultured life mainly because the necessities of life were adequately
secured through an abundant supply of cheap labour. Furthermore, in
other city-states the majority of the citizens were probably artisans, as
Plato showed regarding Athens. Consequently the aristocratic disdain
70
THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
of labour should not be taken by 'primitivist' academics at face value as
a means of devaluing the economic forces fashioning everyday Greek
life. Greek citizens could afford to be, or could pretend to be, dismissive
about the bases of their economy: we need not confirm their claims.
Although some of the more Marxist modernists have grossly
exaggerated the number of slaves in Greece, they certainly played a
major role in the dirty, heavy and dangerous task of mining for the
precious metals. Aegina, one of the first of the western Greek islands to
produce its own coins, was once held to employ 470,000 slaves - on a
rocky and mountainous island with a total area of about 35 square
miles! Much more reliable are modern estimates that the silver mines of
Laurion, which supplied Athens with its raw material, employed in
periods of its most intensive working, some 30,000 slaves. This large
aggregate labour force, predominantly of slaves led by 'metics' but
mostly owned by Greeks, was exploited by means of the city-state
authorities, who granted leases to Athenian citizens who employed
their own gangs of slaves, thus combining large-scale development with
small-scale management, the same kind of approach which the Greeks
used so successfully in the construction of their imposing public
buildings.
The Laurion mines some twenty-five miles south of Athens derived
their name from the 'laurai' or horizontal adits or alleys driven into the
hillsides. When these horizontal 'drifts' were worked out deeper mining
became necessary. The ore was chiefly galena, a lead sulphide, and
yielded a rich reward of between 30 to 300 ounces of silver per ton. One
of the first Athenian rulers to recognize the importance of these mines
was the tyrant, Peisistratus, and the 'owls' first coined by him in 546 BC,
and stamped with the Athenian emblem which gave them their name,
became famous throughout the ancient world. A particularly rich seam
was struck around 490 BC, part of the proceeds of which were saved by
the Athenians, after powerful persuasion by Themistocles, and used to
build the fleet that destroyed the Persians under Xerxes at the battle of
Salamis in 480 BC. Thus was Greek civilization saved from being
strangled on the eve of its greatest triumphs. Themistocles' wisdom
enabled the Athenians to conquer the Persians with their 'owls'. Most
of the great battles of history, however overwhelmingly victorious for
one side at the end of the day, are at some time during their course, 'the
nearest run thing you ever saw in your life' - as Wellington said of
Waterloo. Who would dare say (even among the 'primitivists') that it
was not the economic wealth of Athens and the wise investment of her
silver that enabled the Greek soldiers and fleet to be trained and
supplied well enough to carry the day?
THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
71
A further indication of the extent and importance of the Laurion
mines to Athens may be seen from the fact that well over 2,000 shafts
were sunk, the deepest being 386 ft, with the main shafts up to 6 ft in
diameter, and with each leading to numerous small branch galleries of
about 2 ft square, along which the miners - and probably their children
as in nineteenth-century British coalmines - crawled as they extended
their workings. We have looked briefly at Athens alone since it was the
most important of Greek cities. To a lesser degree the same kind of
developments took place in a large number of other city-states such as
Aegina and Corinth, with the exception, as already noted, of Sparta,
which stubbornly clung to its iron bars. Given such facts, it is difficult to
agree to the minimization of the economic basis of Greek life which is
the tendency of the more extreme 'primitivists'.
Greek and metic private bankers
Coins had thus become the foundation of the Greek financial system.
To what extent and in what manner did it influence the development of
banking? Given the enormous energy devoted to coinage it should come
as no surprise to learn that Greek banking was largely fashioned to sup-
plement coinage, and not largely to supplant it, as in our modern age.
Nor was it a complete substitute for coinage as was necessarily the case
in ancient Sumeria and partially and deliberately the case in Ptolemaic
Egypt. Until the Banking Act 1979 it was the common practice in
Britain to deride the lack of a proper definition of banking by referring
to legal cases which defined a banker as someone carrying on the busi-
ness of banking, and banking as a business carried on by a banker! If
the line between deposit-takers and recognized banks remains function-
ally unclear even today after the passing of that Act, one should not,
therefore, expect to be able precisely to define the nature and functions
of banks and bankers in ancient Greece, despite 'primitivist' claims that
it is inappropriate to talk of modern-type banking, investment or
capital 'markets' in those early days. It is, however, as easy to point to
similarities as it is to contrasts, with the similarities being especially sig-
nificant if, as already noted in manufacturing and mining, the smaller
scale of Greek activity is borne in mind. Despite the primitivists it is
more than probable that the goldsmith-bankers of seventeenth-century
London, who also came to banking through specializing in exchanging
foreign coinages, would readily recognize the Athenian bankers as their
close relatives, while even the nineteenth-century private merchant
bankers would probably not feel too far from home.
One of the important by-products of Greek prejudice against manual
72
THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
labour and against the everyday boredom of business life was to leave
the field wide open to enterprising 'metics' or foreign residents, many
of whom were to become particularly prominent in banking. The first
such banker of whom we have records is Pythius, a merchant banker
who operated throughout western Asia Minor at the beginning of the
fifth century BC and was purported to have become a multimillionaire.
The earliest banker in Greece proper was Philostephanus of Corinth,
who prospered early in the first half of the fifth century. Among his
many important customers was the far-sighted Themistocles, who
deposited the considerable sum of seventy talents in Philostephanus'
bank. Among the earliest and most important bankers in Athens were
the citizens Antisthenes and Archestratus who built up their banking
business in the second half of the fifth century BC. They appear to have
worked in close partnership and jointly employed a promising slave,
Pasion, who rose to eclipse his former masters and became the most
wealthy and famous of all Greek bankers, gaining in the process not
only his freedom but also Athenian citizenship. Pasion began his
banking career in 394 BC and retired in 371 BC, having amassed one of
the largest private fortunes known in classical Greece. In addition to his
more customary banking business Pasion directed the largest shield
factory in Greece, at Athens, where around 200 slaves were employed.
He owned ships, farms and a number of houses in Attica. He also
conducted an embryo hire-purchase or at least hiring business, lending
for a lucrative fee domestic articles such as clothes, blankets, silver
bowls and so forth. In turn, among his employees was the slave
Phormio to whom Pasion granted his freedom. We learn that Phormio
likewise set up in banking business on his own. He married Pasion's
widow shortly after the death of Pasion, and also grew to be
enormously rich.
Among rich moneylenders who might not quite be ranked as full
bankers were the partners Nicobulus and Euergus who financed slave-
owners taking leases for working the Laurion silver mines. Among
other Greek bankers of whose names we have record are Aristolochus
(who became bankrupt), Dyonysodorus, Heracleides (who also became
bankrupt), Lycon, Mnesibulus, Parmenon and Sumathes, the latter at
least remarkable for his honesty. These lesser but named bankers stand
halfway in status and function between the famous houses like Pasion
and Phormio, who conducted a wide variety of mostly large-scale
merchant banking business, and the much more numerous but
anonymous moneylenders and money exchangers, whose activities were
such a common and essential feature of everyday Greek life. These
minor bankers and money-changers would normally conduct their
THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
73
business in or around the temples or other public buildings, setting up
their trapezium-shaped tables (which usually carried a series of lines
and squares for assisting calculations), from which the Greek bankers,
the 'trapezitai', derived their name, much as our name for 'bank' comes
from the Italian 'banca' for bench or 'counter'. The continued close
association of money-changing with banking is probably best known to
us through the episode of Christ's overturning of such tables in the
Temple of Jerusalem (Matthew 21.12).
Money-changing was the earliest and remained the commonest form
of banking activity, especially at the retail level, and was an essential
aspect of trading because of the great variety of different types and
qualities of coinage and the prevalence of imitation and counterfeiting
which have always appeared to be inseparably associated with coinage.
Some of the largest bankers like Pasion himself were so successfully
immersed in 'wholesale' banking that they diverted this less prestigious
side of retail money-changing to smaller bankers. One of the most
important and well-recorded kinds of lending business carried out not
only by bankers but sometimes by other rich persons willing to take a
risk, was 'bottomry' or lending to finance the carriage of freight by
ships. Its high risks were recognized by allowing considerably higher
than average rates of interest. 'Undoubtedly, of all banking and loan
business', says Michell, 'the most general and at the same time most
lucrative and hazardous were the loans made to merchants and
shipmasters for furtherance of commercial ventures in overseas trade,'
(1957, 345). Reference has already been made to lending for leasing
mining activities, especially in the Laurion mines, but this kind of
financial assistance was more widely spread in financing farming and
the construction gangs working on public buildings.
As for deposits, although the particular banking customs varied, like
the coinage, from city to city, these were mostly either current or
deposit accounts, with the latter including (as still to a much lesser
degree with modern banks) valuables of all kinds, such as jewellery and
bullion as well as cash. Contrary to modern practice, no interest was
paid on such cash deposits, whereas interest was paid on current
accounts. The probable reason for this reversal of modern banking
habits was that whereas valuables including cash were kept intact in
'safe' deposits, we know that it was the current accounts which the
Greek bankers relied upon for their lending business, for, as
Demosthenes — who was heavily involved in legal issues for bankers and
their clients - remarked, any banker whose lending was based solely on
his own capital was headed for bankruptcy. Current accounts, then,
provided the major sources of money for lending, and since they paid
74
THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
interest, such lending had to reflect these costs plus the risks attached.
Most lending was secured, and the various legal systems of the city-
states laid down what could or could not be accepted as security for
loans. Among securities accepted for such loans were copper, silver,
gold and even slaves. Armour or farming instruments were sometimes
among objects not allowed to be used for purposes of borrowing, the
security and sustenance of the city-state obviously came before private
profit.
Recorded rates of interest varied between the exceptionally low rates
of just over 6 per cent, to what Demosthenes considered a normal and
fair 10 per cent for run-of-the-mill business, to between 20 and 30 per
cent for such risky business as lending for shipping, although in the
calculations regarding marine lending it is difficult to disentangle the
interest from the insurance elements of the recorded contracts. In
general, the Greek city-states did not lay down maximum rates for
usury. In any case the records of Greek banking are only the tip of the
iceberg, for much of Greek business was informal and spontaneous,
based mostly on the private banker employing the minimum of written
accounts, in sharp contrast to the situation in contemporary Egypt or,
to a lesser degree, in Rome despite the fact that it was mostly Greek
bankers who taught Rome and the rest of the world what banking
meant, at any rate after the advent of the coin.
The Attic money standard
Despite the leadership of Athens which enabled her to spread the sphere
of influence of her coinage system - the Attic silver standard - over a
large part of the western Mediterranean and occasionally beyond, there
were always large numbers of rival coinage systems and quite a few
complicated standards of financial accounting in use at any one time,
creating a persistently powerful and widespread demand for 'bankers'
who could find their way through the money maze. This wasteful dupli-
cation of multiple coinage systems was a probably inevitable result of
the vigorous particularism that gave life and meaning to the Greek city-
state. Few of these rival states, however, had the advantages in size,
political power and prestige - and as the largest entrepot of Greece, in
trade and commerce - that Athens could boast. Above all they lacked
access to such an abundant source of silver as that enjoyed by Athens.
Consequently the most commonly accepted among a large number of
coinage systems was that of Athens. Since pre-coinage moneys had to
be weighed it was a natural development for first the abstract account-
ing systems and then the complete coinages to be related to such
THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
75
weights, the basic unit of which throughout the Greek-speaking world
was the 'drachma' or 'handful' of grain, though the precise weight
taken to represent this varied considerably, for example from less than 3
grams in Corinth to more than 6 grams in Aegina.
Taking the silver drachma as the main, central, standard monetary
unit, one moved down to the less valuable and proportionally lighter
sub-unit, the obol, six of which made one drachma. The obol itself had
an earlier pre-coinage existence as the pointed 'spit' or elongated nail,
and six of these constituted a customary handful similar to that of the
even earlier grain-based measures. Below the obol came the chalkous, in
normal times the smallest monetary unit, and made, as its name
implied, of copper, just like our use of 'coppers' for small change. Eight
chalkoi- usually - made one obol. Moving above the central unit of the
drachma, and ignoring for the moment the stater and other multiples of
the drachma, we come first to the mina, roughly a pound in weight,
equivalent to one hundred drachmae, and finally the talent, equivalent
to sixty minae. If we bear in mind the necessary caution that this widely
used system was only one among many we may build up the following
lists of Attic coins and weights:
Units of account and coins
(a) 8 copper chalkoi = 1 silver obol
(b) 6 obols = 1 silver drachma
(c) 2 drachmae = 1 silver stater
Units of account and weight only
(d) 100 drachmae (or 50 staters) = 1 mina
(e) 60 minae (or 6,000 drachmae) = 1 talent
Both the mina and the native Greek talent were derived from the
Babylonian sexagesimal system and throughout Greece, Asia Minor
and much of the Near East the basic unit of money was the stater
meaning literally 'balancer' or 'weigher'. In the west and mainland
Greece it was initially the two-drachma coin, the didrachm which
became the standard, while a number of eastern city-states preferred
their own three-drachma staters. It was however the Athenian double-
stater, the four-drachma or tetradrachm, with the owl on one side and
head of the goddess Athena on the other, which eventually became the
ancient world's most popular coin by far and therefore in practice the
most common standard or stater by which other coins were weighed
and judged. Thus the term 'stater' referred in various places, depending
on local mint preferences, to two, three or four drachmae when coined
76
THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
in silver, though electrum and gold staters, worth between twenty-four
to thirty silver drachmae were not uncommon in eastern Greece where
they had to compete closely with the golden Persian 'dark' coins.
Bearing in mind the caution that 'standards' were not universal, the
eastern Greek standard, as befitted its geographical location, kept more
strictly to the sexagesimal system, as follows:-
Units of account and coins
(a) 12 copper chalkot = 1 silver obol
(b) 6 obols = 1 silver drachma
(c) 3 drachmae = 1 silver stater
Units of account and of weight only
(d) 60 staters = 1 mina
(e) 60 minae = 1 talent
When copper became used as money in ancient Greece a copper
sheet of around 60 lb in weight, roughly as much as the average man
could conveniently carry, became the common concrete equivalent of
the 'talent'. A strong man could of course carry more, hence the
symbolic significance of talent. Neither the talent nor the mina
appeared in coin form but were, like the pound sterling throughout the
Middle Ages, simply units of account. Coinage covered an enormously
wide value range from the equivalent of twenty-four or twenty-five
drachmae for a gold coin at the top of the range to small base-metal
coins or silver bits of coins like fish-scales or even smaller almost pin-
head-size silver coins at the bottom of the range. The famous Athenian
silver 'owls' usually in one-, two-, and four- (and more rarely in eight-,
ten- and twelve-) drachma pieces, became by far the most widely used
coins in the ancient world, lasting for nearly 600 years, until the supply
dwindled after the exhaustion, given existing techniques, of the Laurion
mines in 25 BC. Their basically unchanged design and unadulterated
quality gave rise to countless but intrinsically unflattering imitations
throughout the Mediterranean and Middle East.
Although values initially fell as coins became commoner, most Greek
cities, and particularly Athens itself, were determined to maintain the
quality and reputation of their coinage. Two obols were the day's pay of
a labourer, while the architect of the Erechtheum temple on the
Acropolis earned about three times as much, a drachma a day. As a
rough but useful guide as to the value of such coins, the average day's
pay for a manual worker in Great Britain in 1982 was over £27, while a
first-rate consultant architect (not necessarily of the quality of those
THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
77
that built the Parthenon) would expect to earn at least £200 a day,
worth in today's inflated currency some 25,000 drachmae.
The development of the subsidiary coinage system was therefore of
much greater importance than we might at first think, and not until
these smaller coins were minted did the new invention play its full part
in the everyday life of ancient Greece. Furthermore the high values of
the precious-metal coins provided a commensurately greater
temptation for counterfeiters, and at the same time speaks much for the
pride of the cities in maintaining their standards which they enforced by
strong penal codes. Hikesias, the father of Diogenes, the famous
philosopher, escaped rather lightly when he was merely banished for
adulterating the silver coinage. Thus the Attic system ranging from
subsidiary coinages of low value for the everyday use of ordinary people
through the medium values of silver coinages for a wide range of local
and overseas trade, to high-value gold coinages used mostly outside
Greece together formed the indispensably strong basis for trade,
banking and political finance. So well known were the Attic and eastern
standards that they could fairly easily, with the aid of the ubiquitous
bankers, be adapted to fit the Persian and other mainly gold-based
systems.
With such a welter of coinages plus a variety of different standards
one may easily appreciate the need for exchange bankers and the strong
desire for a more widespread uniform standard. All the city-states
agreed on the need for uniformity - provided that it was either their
own or that of their current ally that was chosen to be the standard. In
456 BC Athens forced Aegina to take Athenian 'owls' and to cease
minting her own 'turtle' coinage. In 449 BC Athens in furtherance of still
greater uniformity issued an edict ordering all 'foreign' coins to be
handed in to the Athenian mint and compelling all her allies to use the
Attic standard of weights, measures and money. However as Athenian
power declined, so the former subject city-states reissued their own
currencies — and what was much worse, when Sparta in 407 BC cut
Athens off from her silver mines at Laurion and released around 20,000
slaves from the mines, Athens herself was faced with a grave shortage of
coins. Faced with this emergency she minted 84,000 golden drachmae
from the statue of Nike, or Victory, and other treasures which adorned
the Acropolis.
When the coin shortage got even worse in 406 and 405 BC she issued
bronze coins with a thin plating of silver — with the result that the good
coins tended to disappear, which made the shortage even worse. This
infamous situation was made the occasion of what is probably the
world's first statement of Gresham's Law, that bad money drives out
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THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
good. In Aristophanes' comedy, The Frogs, produced in 405 BC the
author wrote: 'I have often noticed that there are good and honest
citizens in Athens who are as old gold to new money. The ancient coins
are excellent . . . well struck and give a pure ring; everywhere they
obtain currency, both in Greece and in strange lands; yet we make no
use of them and prefer those bad copper pieces quite recently issued and
so wretchedly struck' (Aristophanes 1912). The base coins were
demonetized in 393 BC and Athens regained her reputation for fine
coinage. Her civic pride was completely healed when the citizens, in 380
BC voted the money to rebuild their golden treasures in the temples of
the Acropolis, a feat which took them until 330 BC to complete.
However, her drive for greater financial uniformity had to await the
more powerful armies of Alexander and Rome.
Banking in Delos
Athens' predominance in political and cultural affairs and, to a large
extent, therefore in trade, coinage and banking, was continuously being
challenged. Among its many rivals for leadership in banking the island
of Delos may claim a special place. Delos rose to prominence during the
late third and early second centuries BC. Its importance in banking
history can hardly be exaggerated. As a barren offshore island, its
people had to live off their wits and make the most of the island's two
great assets - its magnificent harbour and the famous temple of Apollo.
Around these its trading and financial activities grew to support a large
and very cosmopolitan city of some 30,000 inhabitants, developing first
as a centre of Aegean and later of Mediterranean commerce and
banking and one of the principal clearing houses of the ancient world.
It was an entrepot for the Macedonian trade in timber, pitch, tar and
silver, the best place for the slave trade and the main western depot for
eagerly sought oriental wares brought along the ancient caravan routes
from Arabia, India and even China.
We have well-documented continuous accounts as kept by its
magistrates, recording its main banking and trading activities for over
400 years. Its economy was typical of that prevailing in the other
temples which stood in close connection with the city but was probably
the best of its type and one of the most enduring. Whereas in its earliest
days 'banking in the Athens of Pasion was carried on exclusively in
cash: deposit contracts, Giro transfers and receipts in writing do not
appear to have been known at this period', by the time the Bank of
Delos was in operation 'it was particularly interesting that transactions
in cash were replaced by real credit receipts and payments made on
THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410 79
simple instructions, with accounts kept for each client' (Orsingher
1964, 4). Some indication of the public wealth of the city authorities
and the close involvement of the state with its bank is given by the
substantial savings in cash form, in two public treasuries or chests, kept
for greater protection within the temple of Apollo itself. The different
purposes for which these reserves were kept were indicated on the
sealed jars kept separately within either the 'public' or the 'sacred'
chest. Some of these turned out to be very long-term savings, for the
seals of one series with over 48,000 drachmae remained unbroken for
about twenty years, from 188 to 169 BC.
The direct interest of Delos to us stems from its being both a
historical and geographical link in the wider and more flexible
development of banking business. It connected the early Greeks with
the later Hellenistic and Roman banking eras and it provided the bridge
which joined Italian traders and bankers of the West with those of the
eastern Mediterranean and beyond. The Italian merchants who were
attracted first for purely trading purposes became domiciled and rose to
prominence as citizens of Delos, eventually taking over from the Greeks
and becoming the most important bankers in the city, maintaining the
closest links with the main centres of the rising Roman empire. The
early Greek colonies in Sicily and southern Italy were replicas of
Corinth and Delos; and we have seen how Roman citizens became
increasingly important as merchants and bankers in Delos and over the
Aegean islands. Their activities spread in similar fashion throughout
the central and western Mediterranean, gradually extending into the
interior of Gaul and Spain. For political reasons Rome destroyed
Carthage and Corinth, the main commercial rivals of Delos, and in
contrast until well into the first century BC strongly supported the
economy of Delos, strengthening its position as one of the chief free
ports of the Mediterranean. Consequently, it was a most natural
outcome that the Bank of Delos became the model most closely and
consciously imitated by the banks of Rome. In matters of culture and
commerce, the Hellenistic and Roman empires merged into each other
with mixed results, some baneful and some beneficial as we shall now
see, at least so far as their financial and commercial aspects are
concerned.
Macedonian money and hegemony
The greatest military exploits in history were naturally not without
their important economic and financial causes and consequences, even
if those were clearly of a second order. Even so they should not be
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THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
neglected, for the economic and financial effects linger on far beyond
the more flamboyantly obvious political results. We have seen how the
enormously wealthy Persian inheritors of the Babylonian and Assyrian
empires had twice, in 490 and 480 BC, threatened the independence of
Athens and therefore of all the other Greek city-states, and how the
ready wealth of Athens was a not unimportant factor in defeating the
Persians abroad. We shall now see how finance and, especially, readily
minted coinage, played no small part in defeating the Persians in the
centre of their own empire.
The mainland route from Asia to Greece lay through Thrace and
Macedon, kingdoms of such minor importance that they were simply
bought off by the Persian 'archers'. However, this situation changed
with the accession of Philip II in 360 BC. Philip formed one kingdom out
of a number of previously warring tribes and used their unity as the
basic strength of his growing economic and military power, so that well
before the end of his reign he became the acknowledged leader of all the
Greek states, despite the hostility of Demosthenes' verbal attacks - his
vitriolic Philippics. During Philip's reign the agricultural basis of
Macedon was greatly improved by vast schemes of irrigation, land
drainage and flood control. As Alexander reminded his people shortly
after he became king on the assassination of his father in 336 BC: 'My
father took you over as nomads and paupers, wearing sheepskins,
pasturing a few sheep on the mountains ... he made you inhabitants of
cities and brought good order, law and customs into your lives.' With
better irrigation and drainage and with the canalization of sections of
its more important rivers the agricultural output of the rich alluvial
plains, far larger than those available to the Greeks farther south,
provided the basis for building up the new towns and increasing their
professional armies. Philip was therefore as well supplied with grain as
the Greeks and far better supplied with cattle and with the horses which
were to form his elite cavalry. Robin Lane Fox, who adds his biography
of Alexander to the thousand others, repeats a common view that the
martial superiority of the Macedonians was in part due to their
generous meat diets. Napoleon was obviously not the first to note that
an army marches on its stomach: 'Macedon's more frequent diet of
meat may not be irrelevant to her toughness on the battlefield' (1973,
28). By raiding his neighbours, Philip could add substantially to the
produce of his own pastures - one such raid alone reaped a harvest of
20,000 mares. From such a vast wealth of horses, Alexander could take
his pick, for his twelfth birthday, of his Bucephalus which was to carry
him for fifteen years and many thousands of miles. As an integral part
of Philip's policy of Hellenization a considerable number of prominent
THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
81
Greeks were invited to Macedon, including Aristotle who acted as tutor
to Alexander for three years of his youth, from thirteen to sixteen.
It was, however, the substantial economic improvements that
provided the essential foundation for the growth of Macedonian
political power and enabled Philip to succeed in maintaining the
allegiance of most of the Greek city-states and overcome even the
persuasive influence of Demosthenes on the Athenians. Under Philip,
the Greek centre of gravity moved from what Socrates had denigrated as
the 'frog-ponds' of the south to the wider vistas of the north; a vital
first step in preparation for the vast continental empire that was shortly
to be opened up to Macedonian and Greek arms and Greek culture.
Greece's strategic geographical position at the crossroads of three
continents was about to be used to full advantage.
Towards the end of his reign Philip began issuing his golden stater
depicting his victory in the chariot race at the Olympic games of 356 BC
on one side and the head of Zeus on the other. These coins, and their
inevitable imitations, all advertising his power and influence, spread far
and wide, particularly among the Celtic tribes of central and north-
western Europe, and even crossed the Channel, where they were among
the earliest-dated coins to have been found in Britain. Philip's numerous
coins were important for a number of reasons, quite apart from their
obvious role in improving the media of exchange and accounting. By
widely demonstrating his achievements in the Olympics they confirmed
his social and therefore also his political acceptance as leader of the
Greek nation; Greeks could no longer dismiss the Macedonians as
rough and rude barbarians. To many who used the coins, the head of
Zeus was mistakenly interpreted as that of Philip himself, and so
prepared the way for the issue of coinage to become more fully accepted
as the personal right of the king, a process carried to fulfilment by
Alexander and his followers in the late Hellenistic kingdoms. Also, as
already indicated, his coins 'were to have a dramatic influence on the
Celtic coinages of Europe' (M. J. Price 1980, 41). Furthermore Philip
appears deliberately to have minted far more coins than were currently
justified by the needs of trade or of his armies, probably to act as
readily available financial reserves to support the anti-Persian campaign
for which he was actively preparing in the period immediately preceding
his assassination. Alexander had need', says Professor N. G. L.
Hammond, 'of a prolific and stable coinage' and 'the considerable stock
of gold philippeioi and silver tetradrachms served part of his needs in
336 and 335 bc' (1981, 156).
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The financial consequences of Alexander the Great
When Alexander succeeded to the throne in 336 BC he thus had at his
disposal all the necessary material resources - the armies, allies, sup-
plies and reserves of coinages and so on - that Philip's unfinished task
required. Alexander himself, then barely twenty, was soon to display a
leadership and inspiration unrivalled in history, which in the remark-
ably short space of less than a decade, established a vast Hellenistic
sphere of influence of two million square miles, stretching from
Gibraltar to the Punjab. The armies which achieved those results were
paid in cash, and since they were well fed, expensively trained, highly
paid and well supported by ancillaries, a rich and ready supply of
coinage became a prerequisite of Macedonian imperialistic ambitions.
Macedon was fortunate therefore in having rich mineral resources of
iron, copper, silver and gold, all of which, being the personal property
of the king, could be used directly by him in ways which made them
more effective than when ownership was divided among a large number
of city-states. The payment of his troops was similarly his personal
responsibility, and thus, given his explicit political ambitions, the finan-
cial groundwork for the conquest and occupation of the Persian empire
by Macedonian troops and mercenaries was being single-mindedly,
deliberately prepared. Initially this was bound to be a costly business,
with the costs being met very largely from Macedonian and Greek
resources: only later on did the enormous booty captured by the army
more than pay its costs. Some indication of the size of these costs may
be gleaned from the following facts.
The cavalry, the elite in Alexander's highly skilled army, were paid on
average two drachmae a day, an infantryman one drachma and an
ordinary mercenary, two-thirds of a drachma, or twice the pay of a
labourer. In addition, basic rations were probably supplied free. By the
time this army was fully engaged in Asia Minor the total cost was
around twenty talents a day, that is some half a ton of silver, or 120,000
drachmae (N. G. L. Hammond 1981, 155ff.). Thus by a combination of
foresight, luck and conquest Alexander was not only easily able to
afford such enormous and initially 'unproductive' expenditure but very
quickly took control over coins, bullion and other essential resources in
quantities far beyond the dreams of either his father or his followers.
Once Alexander had established himself in Asia Minor the drain on
Macedonian finance was first halted and then reversed, for the
victorious army, with little cost to itself in lives or equipment, had little
need of replenishment from its home base. Not only could it live off the
country but all the many mints with their stores of bullion were taken
THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
83
over en route, and issued as many coins as Alexander required. After
the capture of the Persian emperor's family at the Battle of Issus in 333
BC, Darius began to negotiate terms for peace. At the siege of Tyre, he
offered Alexander 10,000 talents as ransom plus his daughter's hand in
marriage and all the lands to the west of the Euphrates. 'I would
accept,' said his senior general, Parmenio, 'were I Alexander.' 'I too,'
said Alexander, 'were I Parmenio.' Alexander's demand for 'all Asia'
was soon granted including all the wealth of the Persian kingdoms. The
capture of Damascus brought him 2,600 talents in coin alone, and there
were similar if smaller amounts from a score of other mints. The reverse
flow of coinage to Europe, quite apart from the demands of trade, may
be illustrated by the 3,000 talents which Alexander is known to have
sent to Antipater in Macedon in 331 BC, a considerable sum, but merely
one of the first in a veritable flood of coinage, easily spared from his
rapidly growing fortune in coin and bullion. A similar sum of 3,000
talents was also given by Alexander that year to Menes who deputized
for him after he left Syria. The captured treasury at Susa contained an
incredible amount of bullion including 50,000 talents of silver. When
the dying Darius was finally captured in 330 BC a further 7,000 talents
were taken.
In addition, Darius' central mint at Babylon was taken over and new
currencies, designed by Alexander's moneyers, poured from what was
the most prolific mint in the Persian empire, second only to that at
Amphipolis, the chief mint of Macedon. However there were a large
number of other substantial mints, such as those at Ecbatana, Sardis,
Miletus, Aradus, Sidea, Sydon, Citium and Egyptian Alexandria, to
name only the more important, which together far surpassed the
previous total Greek and Macedonian output. Furthermore, because of
the demands not only of his army, but also of his engineers, scientists,
explorers, retainers and the whole auxiliary forces accompanying his
campaigns - which Alexander saw as being much more of a civilizing,
Hellenizing mission than simply military conquest — the mints became
highly active, coining temple and royal treasures which otherwise would
not have entered circulation. Thus not only was the supply of money,
and of intrinsically full-bodied money, vastly increased, so too was its
velocity of circulation.
The methods by which a large proportion of this immense coinage
was distributed further guaranteed its rapid velocity and wide dispersal.
After all, his soldiers were to a considerable extent mercenaries,
themselves children of mercenaries, and with their Asian and Eurasian
wives, providers of the next generation of mercenaries. Over seventy
towns, new or extended, were established by Alexander, at least twenty-
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THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
one of them named after him — and one after his horse — from Egypt to
'Alexandria Eschate' or 'the farthest', north-east of Samarkand. Young
families and new towns meant high spending; and even single soldiers
are not on average noted for parsimony. The rigid discipline maintained
throughout Alexander's forces prevented personal looting, and
therefore made his soldiers dependent on their generous salaries. These
were frequently handsomely enhanced by large bounties to the soldiers
themselves and to the families of the fallen. After the capture of Susa,
Alexander distributed bounties ranging from 600 drachmae for his
Macedonian cavalrymen to 50 drachmae for the ordinary mercenary.
Generous gratuities were paid to men who through age or sickness, had
become unfit for further service. They were either sent home with their
gratuities or allowed to settle locally. Thus '1,000 over-age Mace-
donians garrisoned the citadel of Susa' (N. G. L. Hammond 1981, 164).
In mid-323 BC, at the treasure-base of Ecbatana Alexander distributed a
total bounty of 2,000 talents to those Greek troops who, after faithful
service, had decided to return home to Greece. Professor Hammond has
also shown how Alexander's care for his troops extended even to
assuming responsibility for their debts to civilians, and he had his
accountants pay off such debts amounting to some 2,000 talents. He
also gave wedding presents to some 10,000 of his soldiers who married
at Susa. His troops were obviously big spenders - or as the modern
economist might say, they had a high marginal propensity to consume.
A large multiplier thus intensified the effect of the high velocity of
circulation.
The accidents of geology and the chances of war combined with the
preferences not only of those who had authority over minting but also
their many unofficial competitors, who issued imitations or
counterfeits, to make the various metallic ratios a bothersome, hit-or-
miss affair. Whatever the ratio that was finally chosen - and as soon as
coins were made the choice was inevitable - the initially established
ratio was bound to come under pressure. These pressures were
considerably lightened if one metal alone was given official preference
for coinage. In that case all the other metals had, by reason of their
being ignored for official coinage, to bear the brunt of fluctuating
values. It was more difficult to juggle with two or even more so with
three metals; hence the tendency through time for the cheaper metals to
become merely tokens, and for bimetallist currencies to lose their
originally chosen relationships. In a way, it was fortunate for the
Greeks, who needed to build up public acceptance for their innovation,
that they had such an abundance of silver and so little of their own
gold, so that silver, the best metal, numismatically speaking, became
THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
85
also the best for their own economic and political purposes. Therefore,
except for emergencies, they ignored gold for coinage and let others,
such as Croesus and the Persians who absorbed his kingdom, wrestle
with bimetallism.
It is believed that the Persians, who learned of coinage from Lydia,
also took over its bimetal ratio, but in any case the Persians soon
established and enforced throughout their domains a ratio of 13V?:1, i.e.
forty units of silver were equal to three units in weight of gold. The
values of their coins were consistently issued at this ratio of 40:3. They
could not of course enforce this ratio outside their kingdoms, so that
the ubiquitous Greek trapezitai were kept busy and wealthy exploiting
divergences, and in the process, like any such arbitrage, reducing the
widest margins to differences which traders could tolerate. Even so the
mainland Greeks would usually expect to purchase one unit of gold
with only twelve units of silver, and this acted as a barrier to the
penetration of Persian gold 'darks' (named after Darius I who first
issued them as early as about 500 bc) into western Greece, so that the
monometallist silver monopolies which Aegina, Corinth and Athens
operated in their own regions were not really threatened by foreign,
golden intrusions.
Such cosy relationships broke down however when huge deposits, not
only of silver, but also of gold, were opened up by Philip in Thrace and
Macedon. In Philip's earlier years he had used the Thracian and not the
Attic standard for his silver, and for the less important gold issues used
the Attic standard. However, as his vast precious metal resources were
more fully exploited, the gold/silver ratios had to be re-established. In
order to safeguard and develop the new gold finds at Mount Pangaeus
near Crenides, the 'town of fountains', which Philip rebuilt and
renamed Philippi, he set up a new mint to help in producing his new
golden Philippeioihovn. around 356 BC. It is an indication of the greater
relative supply of gold to silver that, toward the end of his reign, Philip
was issuing his silver and gold coinage at a 10:1 ratio. There were other
precious mineral deposits in his enlarged kingdom, but Mount
Pangaeus alone yielded 1,000 talents of gold and silver a year. As we
have seen, these mineral reserves helped political and economic power
to move north from Greece to Macedon in the second half of the fourth
century. Philip and Alexander (who continued minting posthumous
Philippeioi, just as his followers continued issuing posthumous
Alexanders') naturally took full advantage of these god-given riches
and put their existing mints into continuous operation at Pella, the
capital, at Philippi, Damastium, and above all at Amphipolis.
Alexander also opened a new mint in 330 BC at Sicyon in the
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THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
Peloponnese. The mint at Amphipolis, in the eighteen years between
346 and 328 BC produced a vast total of thirteen million silver
tetradrachms plus a considerable but unknown amount of gold coins.
All this activity in the Macedonian homeland was in addition to the
continued and vastly increased output of the existing mints in Greece,
Asia Minor, Syria, Egypt, Mesopotamia and indeed throughout the
Hellenistic world. Thus, in Professor Hammond's words, 'we may
realize the stupendous increase in coined money, expenditure and
employment which Alexander brought about in Europe alone, quite
apart from the economic revolution in Asia' (1981, 258).
Alexander could not be bothered with trying to maintain, as his
father had done, an Attic standard in gold and a Thracian for silver.
Instead he insisted on employing the Attic standard only, not just in
Macedon, but, so far as was practicable, throughout his new empire.
Alexander did however follow Philip's custom rather than the Persian
ratio in his bimetallist (though mostly silver) coinage system. Despite
the long-established and widespread acceptance of the Persian 13V3:1
ratio Alexander must have seen this for what it was — an awkward and
complicated relationship which inhibited the quick and ready growth of
trade which he was determined to promote. For he was a man with a
mission, in a hurry to integrate the best of Asian, African and European
civilization under the undoubted supremacy of that of the Greeks.
Coinage was at the heart of communication, hence nothing should
inhibit its wider, more common and ready acceptance. And so
Alexander cut through the knotty problem of bimetallic ratios as he did
with the fabled knot at Gordion. Ten to one, that was the sensible,
practical, straightforward ratio to adopt: let slaves and metics quibble
over minor fractions. In any case Alexander had the reserves of either
gold or silver to apply wherever the divergences were too marked, so as
to remedy a shortage of either one or the other. His armies abroad,
wherever they were, accepted the Attic standard and the Alexandrian
ratio, and this was sufficient guarantee for a wider general acceptance
of these simple and beneficial reforms which enabled coinage, as part
and parcel of the Greek way of life, to penetrate far and wide at a speed
which otherwise might have taken centuries.
While it would be cynical in the extreme to attempt to measure the
significance of Alexander simply in terms of his economic and financial
achievements, nevertheless in recognizing that these alone were so
substantial and far-reaching, one cannot fail to marvel at this
additional if restricted view of his many-sided genius. (Whether cynical
or not, Marxist historians might feel constrained to attempt such an
impossibly one-sided assessment.) Coins were by far the best
THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410 87
propaganda weapon available for advertising Greek, Roman or any
other civilization in the days before mechanical printing was invented.
We have seen how Philip's representation of Zeus as king of the
Olympian gods became commonly associated with the king himself.
This trend became much more marked in the case of the coins issued by
Alexander and his Hellenistic rulers, for the head of Heracles
(Hercules) which appeared on these coins probably intentionally bore a
remarkable resemblance to the idealized portrait of Alexander. After
all, it was generally believed, possibly even by Alexander himself, that
he was descended from Heracles. The Lydians had begun by issuing
coins portraying their kings, but the vastly more important output of
coins in mainland and more democratic Greece had avoided such
pretensions. Philip and Alexander carried the original Lydian concept
of monarchical badges forward into all parts of the ancient world, and,
via the Celts and Romans, into western Europe and Britain. After
Alexander the power to coin money became more obviously, though
not exclusively, a jealously guarded sovereign power, the first to be
assumed by any conquering army (just as British Military Authority
money accompanied the army in the Second World War). On this note
we may conclude our account of the financial consequences of
Alexander by taking the year 197 BC, when the Roman general
Quinctius Flaminius defeated Philip V at the battle of Cynocephalae, as
marking the end of Macedonian hegemony. Thereafter the once mighty
Macedon became a mere vassal of Rome, and the Greek city-states
reverted to their disunited particularism. However in the eastern
Selucid and Egyptian Ptolemaic empires the Hellenistic influences
continued, though on a declining trend, for many generations. Needless
to say Flaminius commemorated his victory by minting gold staters
bearing his own image — the first representation of a living person to
appear on Roman coins. The Greeks, who taught the world the
meaning of coined money, found the Romans, though slow starters, the
most persuasively powerful imitators.
Money and the rise of Rome
The abstract legendary and linguistic influence of Rome on our basic
monetary terms and standards complements the enormous historic
importance of her actual coins. The tribes of Latins and Etruscans had
emerged as neighbours by the time Rome was founded, traditionally in
753 BC, on the site of the lowest bridgeable point of the Tiber, Italy's
only really navigable river. On the Capitol, one of the famous seven
hills, the early Romans built a temple to Jupiter and, naturally enough,
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THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
the temple became the most secure place for keeping reserves of money
in whatever forms were then common, some of which will be examined
shortly. When, according to legend, the Gauls overran most of Rome in
390 BC, the cackling of the geese around the temple on the Capitol
alerted the defenders against what would otherwise have been a sur-
prise attack, and so saved them from defeat. In return the Romans built
a shrine to Moneta, the goddess of warning, or of advice. It is from
Moneta that we derive both 'money' and 'mint'. Among many other
Latin influences on our terms related to coinage are 'copper', 'brass'
and '£. s. d. ' as well as the terms 'pecuniary' and 'expenditure' already
described. The copper deposits of Cyprus were worked up in consider-
able quantities in Italy by the early days of Roman expansion, so that
the island gave its name to the product. The skilled metallurgists of
Brindisi (Brundisium) in southern Italy who combined the copper with
other metals similarly gave their name to 'bronze'.
It has been well said that 'the final legacy of the Hellenistic world to
the Roman Empire was an extensive bronze coinage . . . the Roman
army was paid in bronze until the middle of the second century bc'
(Burnett 1980). The 'libra' became our '£', the French 'livre' and the
modern Italian 'lira'. That 'd should mean 'penny' is not immediately
obvious, but came from one of the most famous Roman silver coins, the
'denarius', and this origin has been acknowledged for two thousand
years, until the new penny or 'p' finally replaced it in 1971. The
abbreviation V is still a little more complicated. Linguistically and
originally a 'schilling' simply meant a piece cut off a ring or bar of
precious metal. But the Romans produced a number of coins more
valuable than the denarius among which were the 'sestertius' and the
'solidus'. The 'solidus', officially issued in a limited number of Roman
mints, meant that it was of 'solid' or pure gold or silver, in contrast to
the 'mancus' or 'manque' coinages which were impure, substandard or
imitations. It is generally accepted that among the many different types,
the 'solidus', worth one-twentieth of a pound of silver and equivalent to
a dozen pennies, became engrafted in the Anglo-Saxon and Norman
mind with the original primitive meaning of 'shilling' to form the
middle of the famous old £.s.d. notation.
The Romans were rather late in adopting the types of well-struck
coinages which the Greeks had developed and had demonstrated so
clearly on their very doorsteps in their colonies in Sicily and southern
Italy. Syracuse, Catania, Taormina in Sicily; Rhegium, Croton and
Tarentum on the southern coast of Italy; Massilia (Marseilles) and
other Greek colonies - all these used and produced a variety of
constantly improved coinages, as did Carthage, with which Rome was
THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
89
in conflict. The inferior quality of the Romans' early coinage fittingly
reflected their as yet undeveloped state, economically and politically.
Heavy and cumbrous currency bars, the aes signatum, were still in
common use in Rome in 275 BC, and although some crude cast silver coins
may have been issued there as early as 300 BC, silver coins did not receive a
wide circulation until the middle of the third century BC. For lower
denominations the most common early Roman coin was the aes grave, a
heavy bronze coin that was also cast rather than struck. The traditional
date of 269 BC is confirmed authoritatively by Mattingly for Rome's first
regular struck silver coinage (Mattingly 1960) .
As in Greece, a large number of Roman towns issued their own
currencies, at least until the ending of the Carthaginian wars with the final
defeat of Hannibal at the battle of Zama in 202 BC. Since the payment of
troops was the most urgent (but not the only) cause for minting, these wars
led to an immense increase in coinage all around the western basin of the
Mediterranean and Carthaginian north Africa. Even so, the vast quantities
of bronze and silver coins were insufficient to meet the demands of war,
and an emergency short-lived issue of gold coins was made. It appears that
for a short time Rome may have altogether run out of money, and was
forced to exist on credit alone. Furthermore towards the later stages of the
war the quality of coinage, both in purity and weight, was noticeably
reduced. After the end of the Punic Wars as a result of the unsatisfactory
state of the coinage a thorough reform of currency had to be undertaken,
another early example of the pendular swing between quality and
quantity.
This was made easier by centralizing the minting of silver in Rome itself
from which a new uniform silver coinage of denarii was issued with
quinarii and sestertii as useful subdivisions. Provincial town mints were
demoted by being allowed to issue bronze coins only. Although this
debasement was merely a minor matter compared with what was to reach
almost astronomical proportions in the age of Diocletian, nevertheless it
was an indication that the Romans did not quite possess the integrity of
the Greeks when it came to maintaining the values of silver. Rome needed
to coin vast quantities of silver to maintain her growing armies. However,
after these emergency debasements the quality of the reformed silver
coinage was generally maintained for over two hundred years. To support
just one legion cost Rome around 1,500,000 denarii a year, so that the main
reason for the regular annual issue of silver denarii was simply to pay the
army. In addition the vast population of Rome, which multiplied to a peak
of about a million, became increasingly dependent on doles of free corn
and other gratuities. The famous public buildings of Rome were similarly
paid for by minting the necessary coinage, though some work was free.
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THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
The temptation towards debasement though in the main held at bay
for a couple of centuries in Rome itself, was strongly felt in those
peripheral areas which retained their rights of coinage. Thus in the later
Hellenistic empire the Ptolemaic regime in 53 BC fell prey to temptation
by issuing grossly debased coinage. In this case it was not so much the
direct effects of war but rather the huge bribes that Ptolemy XII paid to
regain his throne that brought about a debasement that became a
permanent feature of Egyptian currency in the period of the Roman
empire. As an example of the financial importance to Rome of the
tribute from subject tribes, the Carthaginians, after their defeat, agreed
in 201 BC to pay to Rome fifty annual instalments which came in all to
10,000 talents. A vast total of slave labour, continually reinforced by
captured soldiers, was employed not only in agriculture but also in the
various mines within the Roman empire to supply her needs for iron for
military and general purposes; and for copper, silver and gold for
coinage purposes, these latter purposes also being initially determined
by the requirements of the armies. Over 100,000 slaves were taken from
Gaul alone to work in Italy, while large numbers were retained in Gaul
to work in her mines. The output of iron from the Montagne Noire
region alone is estimated at some thousands of tons per year during the
latter part of the first century AD. These mines also produced
considerable quantities of lead, silver and copper. Even greater supplies
of silver came from Spain, especially from its famous Rio Tinto area
where recent archaeological digs have revealed the vast extent of Roman
workings (G. D. B. Jones 1980, 146f£).
Roman currency circulated not only over its own vast domains but
also was found beyond the imperial boundaries. Britain, for example,
though outside the empire until the conquest of a large part of the
country by Claudius in AD 40, had already become familiar with Roman
coins and especially with Celtic coinages of Roman type for at least a
century earlier. When Julius Caesar made his two raids in 55 and 54 BC
a number of Celtic tribes in southern and eastern Britain were already
producing coins from their independent mints and these, together with
Roman coins, circulated alongside the crude sword-blade currencies
that Caesar disdained. Julius Caesar was no longer content to adorn his
coins with ancestral heads but preferred to portray his own likeness.
Indeed, nowhere has the propaganda value of coins been used to greater
effect than in Rome. Brutus, following Caesar, not only had his own
profile on the obverse, but advertised on the reverse the gruesome events
which led to his brief rule: a cap of freedom flanked by two daggers.
Nero, as actor and fiddler, faithfully reflected his ego in his coinage,
while the official adoption of Christianity by Constantine, when, in
THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
91
Grant's vivid phrase, 'Galilee conquered Rome', began the long series
of crosses that remain on British coins to this day, e.g. the Llantrisant
mint mark on the £1 coin.
Despite the slogan SPQR {Senatus Populusque Romanus), which
paid lip-service to the authority of the Senate, in actual fact the issue,
design and amount of coinage became the personal prerogative of the
Roman emperors themselves. For over 500 years the coins of Rome
publicly portrayed the events, hopes, ambitions, lives and lies, of its
rulers. The enormous but previously neglected importance of such
coinage as a historical record, is powerfully captured by Professor
Grant's stimulating account of Roman History from Coins (1968).
Grant clearly demonstrates that 'we need to study the coinage as well as
the literature before we can attempt a political history of the Romans';
and the same applies with equal if not greater force with regard to its
economic history. So enthusiastic is Grant's assessment of the
propaganda value of such money that he even goes as far as saying that,
in certain cases at least, 'the primary function of the coins is to record
the messages which the emperor and his advisers desired to commend
to the populations of the empire' (Grant 1968, 17, 69). If this particular
aspect were generalized it would surely portray an exaggerated view
and one that the economist must dispute. Yet it does illustrate with
typical clarity the tremendous interest aroused by coins in ancient
times, even in the most advanced peoples.
Coins were clearly far more than merely media of exchange. But then
one of the constant themes that emerge from this study of money,
whether in primitive, archaic or modern times, is just that: money is
always much more than simply a method of exchanging goods and
services. Thus economists who ignore the non-economic aspects of
money are as guilty as those numismatists and 'primitivists' who
minimize its economic bases. In fairness to Professor Grant, it must be
added that despite the views given in the quotations above, he provides
many telling examples of the widespread distribution of Roman coins
as a result of trade in such articles as amber, ivory, silk, incense and
pepper, and refers to Mortimer Wheeler's vivid description of these as
'the five main-springs of Roman long-range trade' (Grant 1968, 85).
Similarly, he shows that the 'local' issues of coinage cannot be
dismissed as of local consequence only or of narrowly limited
circulation, but in contrast were commonly widely dispersed by the
needs of trade.
Given the dominance of coinage, what role was then left for banking?
In sum one might say that although coins overshadowed banks in
monetary importance, the rise of Rome and the vast size of its economy
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THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
gave considerable scope for the development of banking also, although
banks remain of secondary importance throughout the whole period of
the Roman empire. In no way was there a sense that coinage was a
necessary preliminary to the development of banking. Our modern
experience of this kind of 'inevitability' must not lead us to look for
parallels where they patently do not exist. We know, and are still
learning, an immense amount about Roman coinage, because of the
huge reservoir of hundreds of thousands of such coins still existing in
private collections and museums. In comparison our knowledge of
Roman banking and credit is minimal. Coins are durable; paper is
perishable, so that though much nearer in time, the Roman bankers
have provided us with much less concrete evidence of their activities
than is given by the far older Babylonian bankers with their abundance
of financial accounts recorded as it happened for all time in tablets of
clay. Admittedly, coinage was dominant in Rome; but its dominance
over banking may well have been exaggerated by its greater durability.
Keith Hopkins, an expert on Roman trade, neatly summarized the
situation thus: 'We know almost nothing of credit in the Roman world;
that does not mean that credit played a negligible role, but rather that
we cannot estimate its importance' (1980, 106).
However, despite the advanced development of private banking,
partly in conscious imitation of that of the Greeks and the Egyptians,
no centralized state giro system developed in the Roman empire to
compare with that which had been the case in Egypt. The Romans
either failed or did not attempt to establish a unified state banking
system, despite evidence that Roman statesmen were well aware of the
advantages that Egypt had gained from its giro and from its royal state
banking system. 'It is interesting', says Rostovtzeff, 'that the idea of a
central state bank survived', and had it received more support it might
well have become 'a credit institution for the whole of the Roman
Empire' (Rostovtzeff 1941, 1288). Rome and Constantinople became
the main inheritors of the banking wisdom of the ancient world, which
by means of the Roman conquest had become 'knitted together into one
economic unit by the establishment of lasting and uninterrupted social
and economic relations between the united West and the equally united
East' (Rostovtzeff 1941, 109). However the Babylonians had developed
their banking to a sophisticated degree, since their banks had also to
carry out the monetary functions of coinage, because they lived long
before that invention. The Ptolemaic Egyptians segregated their limited
coinage system from their state banking system. The Romans, however,
preferred coins for the many kinds of services which both ancient (and
modern) banks normally provided. Nevertheless Rome's banks very
THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
93
quickly outgrew their early confinement to the Capitol, and soon
spread their tables and booths along the sides of the Forum.
During the second century BC these booths were replaced by a fine
basilica where, according to Breasted,
the new wealthy class met to transact financial business and large com-
panies were formed for the collection of taxes and for taking government
contracts to build roads and bridges or to erect public buildings. Shares in
such companies were daily sold, and a business like that of a modern stock
exchange developed in the Forum. (1920, 630)
This possibly extreme 'modernistic' view is confirmed in part, though
not on the whole, when account is taken both of the immense size of
private fortunes which large numbers of the richest Roman citizens had
amassed and which required daily recourse to bankers, and of the
extent to which the 'publicans' or the tax-farming estate agents, so
often linked with sinners in the Bible, directly carried out banking func-
tions. Thus a recent, and on balance 'primitivist', authority on the
Roman economy shows that 'the scale of the largest private fortunes at
Rome was extremely high' and gave examples of two such fortunate
men who were worth around 400 million sesterces, or in real terms
between three-quarters and one and a half million metric tons of wheat.
He then compares this with the largest private fortunes in mid-
sixteenth- and mid-seventeenth-century England, which at a real value
of between 21,000 and 42,000 tons would appear to make the wealthiest
Romans some thirty or forty times richer than their English counterparts
(Duncan-Jones 1982, 4-5).
Roman bankers knew their place: and Roman banks, despite their
growing importance were supplementary to the dominant mints. By
controlling the mints personally, the emperors saw no need to stimulate
banking: a state system of banking failed to appear and private banking
remained functionally inferior to coinage. Thus the Greeks, although they
were not strictly speaking the inventors of money or of banking, had
developed both sides of money, the anonymous and the written, to a high
pitch of efficiency. However, because the invention of coinage enabled the
financial aspects of political and economic life to make such considerable
advances and be so adaptable, there was no pressure to improve banking
practices to anything like the same degree. With us today, coinage is very
much a minor monetary matter (though not as unimportant as is
dismissively implied by its almost total neglect by most modern
economists) , while banking because of its general excellence is paramount.
In the Roman empire the situation was almost exactly the reverse.
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THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
Roman finance, Augustus to Aurelian, 14 bc-ad 275
Although the history of the Roman republic and empire, west and east,
spans some twenty-two centuries, from 753 BC to AD 1453, the impor-
tant section, so far as our financial study is concerned, comprises barely
a third of that immense period, from around 300 BC to the fall of the
western empire early in the fifth century AD. The great expansionary
stage was almost completed in or shortly after the Augustan age (say by
AD 138, if we include the conquests of Trajan and Hadrian, though
some later emperors added considerable new territories). Rome seems
thereafter to have adopted a defensive policy of containment. As the
contemporary Roman historian Appian described it: 'Possessing the
best part of the earth and sea the emperors reject rule over poverty-
stricken and profitless tribes of barbarians.' Therein lies the heart of the
matter so far as the financial watershed in Roman history is concerned.
Once expansion over the richer lands ceased to yield its customary
handsome rewards the Roman empire found itself inevitably thrown
more and more upon the further utilization of its existing resources. In
a macro-economic sense, diminishing returns began to exhibit their
universal and, at first, hidden consequences.
In political and military terms, 'by giving up the task of expansion
she can be said to have sown the seeds of her own destruction, by those
she had failed to conquer', the eager barbarians on her borders (Mann
1979, 183). In coinage terms, that is in the fundamental economic terms
of those days, expansion meant a flood of precious metals, with slaves
to work the mines, in addition to the tribute exacted, which was
customarily also paid largely in the precious metals. Thus in addition to
the 14,000 talents extorted from Carthage in the first and second Punic
Wars (10,000, as noted above, after the second war), Sidon paid Rome
15,000 talents between 189 and 177 BC, Greece and Macedon paid some
12,000 talents between 201 and 167 BC, while Spain paid over 3,300
talents in the ten years following the Roman conquest in 206 BC, besides
giving up her enormously more valuable gold and silver mines, which
like all such mines became the property of the Roman state, and later,
the personal property of the emperor. Even so, as we have seen,
occasionally the influx of new bullion supplies failed to keep pace with
demand. These occasions changed from being the exception into being
the rule from the end of the second century AD onward.
During one of Rome's greatest periods of expansion, between 157 BC
and about 50 BC the active circulation of Roman coinage, mostly silver,
multiplied by ten times, but this was accompanied by an increased
amount and geographical extent of trading which, with other factors,
THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
95
such as the holding of greater cash reserves in the expanding cash-based
banks and in the Roman treasury, held back the inflation which would
otherwise have followed such a flood of new money. As Keith Hopkins
has perceptively observed: 'The steep rise in money supply had little
impact on prices because of the substantial rise in the volume of trade
in an expanded area and partly because money percolated into a
myriad of transactions which had previously been embedded in the
subsistence economy' (1980, 110). However, all these factors began
cumulatively to work the other way as soon as the era of expansion was
over, culminating in rampant inflation, rigid rationing, a substantial
return to payments in kind rather than in money, gross debasement of
the coinage, and inevitably in the West, the end of empire itself.
Since coinage was the direct responsibility of the central authorities,
with gold and silver coins being the direct, personal responsibility of
the emperor, any financial pressures on them were immediately
reflected in their coinage - mostly, in the later stages of the empire, by
progressive debasement. The debasement occurred initially in the
bronze coinages, which virtually became tokens, and then affected
mainly silver, which had become by far the most important metal for
coinage. Gold remained as far as was possible, undebased or suffered to
a far smaller degree than did the silver and bronze coinages. The
Romans were as proud of the high quality of their aureus and, at least
after Constantine, their gold solidus, as Athens had been of its silver
'owls', and with almost as good reason. As Mattingly has demon-
strated, 'a gold coinage was clearly necessary for the Empire, both for
the sake of prestige and for the practical necessity of dealing with the
expanding trade and rising prices' (1960, 121).
Augustus (30 BC to AD 14) carried out a thorough reform of the
coinage system, issuing a new gold aureus at 42 to the pound weight,
and a half-sized gold quinareus at 84 to the pound as well as a large
silver denarius, also at 84 to the pound, with 25 denarii being worth 1
aureus or 100 sesterces. Both gold and silver coins were practically pure.
In addition, there was a less carefully produced subsidiary coinage of
both brass and copper, e.g. a one-ounce brass sestertius and a copper as
and quarter as. Financial accounting, both public and private, was
carried out in terms of the denarius and the sestertius, which was one-
quarter of a denarius. In the long-lived Augustan system, the gold
aureus and the silver denarius were the main, standard coins of the
Roman bimetallist system which, by and large, functioned effectively
for two centuries. Augustus also laid the basis of a new taxation system
which similarly endured, but with increasing strain, for almost as long.
It was not until the flood of foreign tribute was exhausted that the
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THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
state's financial inadequacies necessitated drastic changes in fiscal
policy. Taxes were unchanged for generations if not for centuries.
Augustus had however managed to establish three new taxes: first, a 1
per cent general sales tax; secondly the tributum soli, which was a 1 per
cent tax on the assessed value of land; and thirdly the tributum capitis,
a flat-rate poll tax on 'adults' aged from 12 or 14 to 65.
With occasional adjustments, supplemented by frequent recourse to
requisitioning, these remained adequate until the increased pace of
inflation from the middle of the third century AD caused a complete
breakdown in Rome's financial affairs. Eventually Diocletian managed
to find a temporary and partial solution to the problem. Nero (ad
54-68) reduced the gold weight of the aureus to one-forty-fifth of a
pound and also began the process of debasing the denarius by
moderately and therefore unobtrusively reducing its silver content to 90
per cent. Thereafter, despite a few desperate attempts to restore the
Augustan standard, debasement became gradually the accepted method
by which emperors sought to make ends meet. Even so, the degree of
inflation remained moderate until the latter half of the third century AD.
The contrast between the relatively mild inflation based on a relatively
sound and successful bimetallist currency during the first two centuries
AD and the chaotic monetary conditions of the two following centuries
is most marked, and together they highlight the importance of the reign
of Diocletian and his immediate precursors and followers as a
watershed between these widely different eras.
Public finances, crumbling under the mounting weight of welfare
payments and subsidies, appear to have been the Achilles' heel of
ancient, as perhaps of modern, civilizations. Themistocles was not
immortal, and the Athenians could not rely on always having someone
to persuade them to save their money from immediate consumption. 'It
is perfectly clear,' says Professor Michell, 'that the chance of currying
favour with the irresponsible masses by offering them the means of
plundering the rich was in Greece, as it is today, the best policy for the
demagogues' (1957, 393). There can be little doubt, too, that it was
these financial pressures, to which such generous subsidies added their
considerable weight, that 'should in fact be branded as, in all
probability, the real cause of the destruction of the noblest of all states
known to history' (Andreades 1933, 363). As with Greek public finance,
so later was it in Rome.
Only the superior administrative and legal systems of the Romans
plus the fiscal innovations of Diocletian delayed the inevitable decay for
so long, for the scale of demands made on the public purse was far
higher in Rome than in Greece. The richer Romans were also able to
THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
97
avoid high taxation more easily than was the case in Greece, and as we
have seen, the differences between rich and poor were also far greater in
Rome. Taxes were constantly inadequate, and difficulties with such
increasingly inadequate, belatedly adjusted, visible taxes made Rome
rely all the more on the easy, ready-to-hand, hidden taxation in the
form of currency debasement. Short-lived, fitful reforms failed to
reverse the secular downward slide.
The financial pressures through the wearing out of coins, shipwrecks,
drains of money in exchange for the luxuries of the east, gifts to
German barbarians, the growth in urban populations, the decline in the
output and perhaps also in the physical productivity of agriculture, the
working out of the richest mines, and above all the 'bread and circuses'
policies deemed essential to keep minimum standards of orderly city
life, all these worked together cumulatively to tempt imperial Rome
into perpetual debasement, interspersed with occasional reforms which
were soon doomed to failure. As well as supplying free or cheap bread
and wine, imperial 'liberalities' or 'congiaria' in the form of cash doles
were distributed from time to time, notably by Trajan (ad 98-117) and
even more so by Hadrian (117-138) and his successors. What emperor
and citizens had originally seen as a rare privilege had become a
customary expectation from the beginning of the second century AD.
They 'constituted a serious burden on the exchequer and contributed
their share towards State bankruptcy' (Mattingly 1960, 149).
Even when the urban poor in Rome alone (the population of which
was a million or more) were provided with food in kind, most of this
was necessarily imported, and, though some was requisitioned, much
of it was purchased with cash. Rome needed to import at least 150,000
tons of grain every year, most of the imports coming from North
Africa. The children of the poor received 'alimenta', bread rations or
the equivalent for their support. As many as 200,000 persons in Rome
itself, without counting similar subsidization known to be common
elsewhere, received distributions of wheat free of charge. When to these
burdens is added the immense cost of a large army and a growing
bureaucracy (even if the numbers of the latter were in fact small in
relation to the huge populations they administered), one can easily see
how the strains on the public budget grew to breaking point, all the
more so when these strains were channelled unequally on to the coinage
system. After Augustus' reform of the monetary and fiscal system at the
beginning of the first century, the silver coinage remained pure, or
nearly so, for the rest of that century. By AD 250, however, the silver
content of the coins was down to 40 per cent.
Thereafter the pace of inflation and of debasement rapidly
98
THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
accelerated, and by AD 270 the silver content had fallen to 4 per cent or
less. Since there was obviously no general index of prices with which to
measure the force of inflation, we are thrown back on using prices of
important commodities such as wheat, pork and slaves plus the wealth
of information contained in Diocletian's famous 'Edict of Prices'. While
the decline in output was a partial cause in the phenomenal rise of
wheat prices, there can be no doubt that monetary inflation was by far
the more important. A recent expert quantification of the pace of
inflation summarizes the position thus:
Overall, the evidence suggests that prices in the mid-third century were
about three times the level of first-century prices but that mid-Diocletianic
prices were 50-70 times more than those of the first century. This argues
relatively slow price-change up to the time of Gallienus, followed by very
rapid price increases from about 260 onwards. (Duncan-Jones 1982, 375)
Gallienus' relatively short reign (260-8) marked the climax of
physical debasement, with the so-called 'silver' denarius containing
only about 4 per cent silver. In addition his mints produced a flood of
copper 'billons' hardly more than flakes of metal impressed on one side
only. Such grossly inferior coinage was refused by the banks. The limits
of that form of debasement, which had begun moderately with Nero
200 hundred years earlier, had been reached. As long as coins of
reasonable quality had to be produced, so long was inflation, given the
practical absence of credit inflation in the cash-based Graeco-Roman
system, limited by the slow and laborious process of hand-produced
coinage. Gallienus threw any pretence of quality to the winds, but his
temporary success in securing funds soon led to a marked increase in
the pace of inflation and a temporary breakdown of the banking
system.
The next emperor of note in this connection was Aurelian (270—5)
who, faced with the chaotic condition of the coinage following
Gallienus, was forced to carry out a most peculiar 'reform' of the
coinage. He issued two new coins, the main issue marked 'XX. I', the
precise meaning of which remains a matter of dispute among
numismatists. The economic importance of Aurelian's coinage however
comes from the fact that he retariffed or revalued the coinage to fit the
current rapidly increased level of prices. In general he raised the
nominal value of his coins by 2Vi times the previous value of similar
coins. In this way the Roman state (or any other state) could keep one
jump ahead of the inflation inevitably caused thereby. This new
principle of coinage revaluation released the brake upon inflation
previously exerted by the limited means of hand-struck minting, for this
THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
99
new and subtle form of 'debasement' masquerading as 'reform' could
be applied at a stroke to the whole of the existing as well as to the
currently produced coinage. Aurelian had invented a method of
inflationary finance which continued to be used by hard-pressed
emperors for over one hundred years and is one of the main reasons for
the contrasting types of inflation in the first and second main periods in
the financial history of imperial Rome. Inflation took off; and money-
based trade came to a virtual standstill. Though Aurelian was murdered
in 275, such remained the position facing Diocletian when he became
emperor in AD 284.
Modern believers in the disinflationary magic of a gold currency,
whether followers of Jacques Rueff or the pro-gold lobby of the US
Congress, should note that Aurelian proved conclusively that a
'reformed' currency is perfectly compatible with an increase rather than
a decrease in inflation. Those who, erroneously, hold that an increase in
the metallic quality of money is either a necessary or a sufficient step to
remove inflation, would probably be as puzzled over Aurelian's financial
adventures as was that most famous historian of the Decline and Fall of
the Roman Empire, Gibbon himself. While it would appear to be
irrefutable that the vast tributes which Aurelian brought to Rome from
his eastern conquest (discounting the 15,000 lbs weight of gold that he
donated to Rome's temple of the Sun) formed the main source of the
issues of reformed coinages from his mints, Gibbon was puzzled as to
why the issue of new coins should have led to an insurrection led by the
moneyers themselves. Gibbon quotes a private letter from Aurelian:
'The workmen of the mint, at the instigation of Felicissimus, a slave to
whom I had intrusted an employment in the finances, have risen in
rebellion. They are at length suppressed, but seven thousand of my
soldiers have been slain in the contest.' Rarely can a reform of the
coinage have been so costly in real terms — nor as it turned out in long-
term inflationary costs either. However, Gibbon, who obviously
considered Aurelian to have been a misjudged monarch, plaintively
reminds us that 'the years abandoned to public disorders exceeded the
months allotted to the martial reign of Aurelian, [so] we must confess
that a few short intervals of peace were insufficient for the arduous
work of reformation'. Given the inflationary consequences of Gibbon's
favourite, one wonders at his conclusion that 'since the foundation of
Rome no general had more nobly deserved a triumph than Aurelian'
(1788, 1, 300-2). However as far as the Roman economy was concerned
Aurelian's contribution was more of a disaster than a triumph. It was
largely because of the nature of his 'reform' that the rate of inflation
was enabled to rise far above what had previously been possible, even by
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THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
the irresponsible Gallienus. After Aurelian, for two centuries inflation
became rampant throughout the Roman empire.
Diocletian and the world's first budget, 284-305
In the short space of four decades (244-84), between the assassination
of Gordian and the accession of Diocletian inclusive, Rome had
endured no less than fifty-seven emperors. The state was in a complete
mess, administratively, economically and financially. The strong rule of
Diocletian, (284-305), followed fairly shortly thereafter by the equally
strong Constantine (306—37, if we date the beginning of his power in the
West from the time he was declared emperor by his own troops in York),
recreated sufficient order and stability in government and, in a peculiar
fashion, in finance also, to enable the empire to endure more or less
intact for a further century. The logistical foundation of the army and
of the administration was made secure through Diocletian's rationing
and budgetary system, while Constantine succeeded in supplying the
richer citizens as well as the two main spending units, the army and
administration, with a pure and adequate supply of gold coins. Thus
rampant inflation in prices, accommodated by and generated by a flood
of inferior coinage proceeded apace, afflicting the majority of the rela-
tively poor, while the rich and powerful found a way of avoiding the
disadvantages of the runaway inflation. It was Diocletian who first
taught Rome how to live with such inflation, and the success of his new
system was confirmed and strengthened still further by Constantine. In
retrospect there can be no doubt that together they saved the empire in
the West until the fifth century, while Constantine set the basis for
maintaining the strong financial influence of Constantinople on the
coinage of the shrinking eastern sections of the empire until the middle
of the fifteenth century. The political, economic and financial chaos of
the third quarter of the third century was replaced by an enduring two-
tier system, whereby the persistent inflation was overcome in those key
sectors where governmental finance and administration were con-
cerned, even if over the unshielded sectors of the economy inflation
continued unabated.
The weaknesses of the empire from 260 to 284 were so grave that
only a complete reformation stood any chance of success. Diocletian's
prescribed cure was comprehensively planned. After an initial period of
detailed and painstaking assessment of the political and economic facts
his ideas were then rigorously pushed through to their logical
conclusions. His comprehensive, and well-integrated package of reform
was based on the following five features: first, a reformed currency;
THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
101
secondly, a prices and incomes policy; thirdly, a demographic and
economic census coupled with an annual budget; fourthly, a systematic
adoption of taxation and payment in kind; and finally - a feature
without which all other aspects would have failed - an administrative
reconstruction of the army, civil service and regional government.
Although these five features may be separated for analysis, the success
or failure of each directly affected the other features. Together they
made an integrated policy which developed gradually into a formula for
successful and stable government.
Diocletian's main efforts in currency reform took place in AD 295. He
realized that confidence in coinage (i.e. in money) had been almost
completely lost despite Valerian's short-lived 'reforms'. He therefore
struck five new coins: a full-weight, pure gold aureus, at sixty to the
pound weight, and an almost pure silver coin at ninety-six to the
pound. In addition there were three coins, covering large, medium and
small sizes, all made of silvered bronze. In retrospect it is clear (from
letters and declarations made by Diocletian) that he expected his
currency reforms to eradicate or at least to slow down the rapid
inflation which had been eroding the basis of economic life throughout
the Roman empire. After all, his coinage system was very similar in
quality to that of Nero: but in contrast prices under Diocletian
remained a hundred times higher than in Nero's reign. To Diocletian's
surprise, anger, and consternation, however, prices continued their
upward surge. The momentum of price rises, built up to an accelerated
degree during the previous forty years and supported by a flood of poor
quality coinage, was far too strong to be halted simply by minting a
supply of new coins which in total was small in relation to the vast
supply already in the hands of the people. Not that, in themselves, the
new coins were inconsiderable in amount, for, as Mattingly shows, 'it is
highly probable that Diocletian's eastern victories placed large new
stocks of gold and silver at his disposal' (1960, 250). This was another
example of the integrated nature of his policies. Nevertheless, for a
number of years the selective process inevitable whenever good and bad
coins circulate together had been at work, whereby the good coins were
retained, or parted with only when absolutely necessary, as in
particular, for the payment of taxes, while the velocity of circulation of
the bad coins used as far as possible everywhere else, was speeded up.
No doubt, Diocletian's new coins received this same selective treatment.
Diocletian was therefore driven to attempt to impose direct controls on
all prices.
The Edict of Prices of 301 is among the most important economic
documents - or rather, series of documents - of the Roman empire.
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THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
Although issued 1,700 years ago, we are still in the process of discovering
more information about these famous edicts. In 1970 an earthquake at
Aezani in central Turkey, in destroying a mosque, gave easier access to
previously existing buildings in and around that site, which included
some of the best-preserved Roman ruins in Turkey. Amid the ruins of the
modern mosque, the medieval Christian church and the ancient temple
of Zeus, which occupied the same general site, were found Roman coins
of the fourth century and also a fairly comprehensive and very well-
preserved copy of Diocletian's Price Edict, comprising 8V2 of the original
fourteen sections. The uncovered coins also cleared up another
archaeological mystery, namely the precise appearance of the statue of
Zeus after which the vast marble temple was named - another example
of the more general historical evidence provided by coinage. It is perhaps
appropriate that our knowledge of the worst inflationary period of the
ancient world should thus accidentally come to light at a time of the
most widespread inflation yet suffered in the modern world. Even so our
knowledge of the edict is still not complete despite fragments having
been found in over thirty different cities; and though these are mostly in
the eastern half of the empire, there is no doubt that the code of prices
was to apply equally throughout the whole empire. Indeed one of the
criticisms subsequently levied against the code, and a reason for its
failure, is that it made no allowance for regional differences in prices,
when such differences were very considerable.
It is of some importance to realize that the edict was in effect both a
prices and incomes policy, for as well as giving the official prices for an
incredibly long list of goods, the edict also gave the rates for services and
personal wages and salaries, for slaves, agricultural labourers, public
workers, from architects to stonemasons, the various grades of the civil
service and the ranks of the army - all these were clearly stipulated in
very considerable detail. Although this mass of detail was based on
painstaking and laborious study, the edict nevertheless represented
official wishful thinking - the prices that were listed were thought fair
and reasonable at the time (ad 301) but were not the market prices that
actually obtained. Indeed there is little doubt that 'profiteers' were
singled out for blame, for naturally in such inflationary conditions, they
flourished at the expense of honest traders. However the fact that
inflation was not caused by profiteers soon became obvious, for there is
considerable evidence not only that goods were driven off the market
when traders held on to their stock rather than exchange at the official
prices, which were too low to enable them to earn a living, but that the
prices at which trading was actually carried out were in fact far higher
than those stipulated in the edicts.
THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410 103
The maximum prices for goods and services laid down in the edicts
are, in retrospect, extremely important in giving a picture of the relative
values of goods and services, even if the actual prices given were rather
low at the time they were issued and even if they were very soon
overtaken in practice. Richard Duncan Jones gives a number of
examples to show how the inflation of prices continued despite
Diocletian's reform of the currency and despite his Edict on Prices.
Thus a papyrus of 335 shows wheat prices sixty-three times higher than
listed in the edict. Given the very limited success of his monetary policy
and also of his prices and incomes policy, Diocletian was driven to rely
very much more on isolating the more important sectors of the
economy from the harmful and unreliable influences of the market.
The third aspect of his policy was, as noted, to produce an annual
budget on the basis of a complete economic and demographic census of
the empire — a sort of Roman Domesday Book, but a much more
thorough and advanced survey than that of King William, for Norman
England was far more primitive than ancient Rome. Nevertheless the
comparison brings out the flavour of the detailed researches which
underlay the most famous of all Diocletian's innovations - the world's
first budget. We have already noted that the sound Augustan system of
taxation allowed room, whenever the state's revenue fell short of its
expenditure, for supplementing its revenue by various means. Nero and
others had tried confiscating the property of rich citizens after serving
trumped up charges against them. However the main method of
supplementation was simply by the emperor or Senate authorizing the
prefect or general concerned to requisition whatever was necessary for
his purpose, for example for paying for public works or for supplying
arms or uniforms for the army.
Until the time of Diocletian such requisitioning was done on a
piecemeal basis, as and when necessary. It was a wasteful process, for
very often the central authorities in Rome or elsewhere would not be in
a position to relieve the shortages existing in one place with a surplus
existing - but unknown to the central authorities - elsewhere, since it
was natural for those in charge of resources, whether the civil service or
the army, to keep quiet about their surpluses and to complain loudly of
their deficits. Furthermore there was no foreknowledge of the likely
balances of surplus or deficit since planning and requisitioning were
both carried out independently and on an uncoordinated time basis.
Diocletian changed all that. His census gave him a view of the
reasonable output of the various regions in relation to the needs of the
army and civil service and of the public works required in that region.
As far as possible each region was to supply its own needs, though few
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THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
could be self-sufficient, while special allowances were made for large
towns like Rome which could obviously never attain such a balance.
Each September the civil and military administrators had to submit
their estimated revenues and expenditures (in real as well as in
monetary terms, as we shall note below) to the emperor. The central
authorities could then, by comparing one regional set of accounts with
the other, see where savings could be made by offsetting estimated
surpluses with estimated deficits. September was the obvious month on
which to base the annual budget, since knowledge of the year's harvest
would first become available then, and after all agriculture was by far
the most important sector of the economy, so that fluctuations in
agricultural output had a preponderant importance in the total budget.
Keynes once remarked - significantly in connection with unbalanced
budgets - that there was nothing sacred in the time it took the earth to
go around the sun: but to Diocletian and subsequently to most societies
throughout time, the dominance of agriculture has inevitably caused
most accounts, whether public or private, to be based on the results of
the annual harvest. It was Diocletian's genius which first recognized the
importance of bringing the affairs of state into line with the regular
order of the universe.
Diocletian's fiscal policy would not have been successful without the
fourth arm of policy, namely the implementation of a system of receipts
and payments in kind rather than simply in money. The instability of
money prices and the habit of hoarding good coins meant on the one
hand that the supply of good money was insufficient to pay the
increasing taxes necessary to the Diocletianic system, and on the other
hand that allocations from central to local authorities, if based on
money alone, would have been far too unreliable and in general
inefficient. This would have led inescapably to an unworkable increase
in requisitioning in the old, sporadic uncoordinated and highly wasteful
fashion. Consequently the regularization of requisitioning based on a
rigid rationing of resources became a vital feature of Diocletian's
reform. Taxes need not be paid in gold (though some continued to be):
they would be accepted in kind, and taxpayers were encouraged or
forced to make their payments in kind. Similarly allocations were
distributed largely in kind. In this way the vital services of the army and
civil service were secured, for on these rested the whole of the economic
and political structure of the empire. In this way the most important
sectors of the economy, from the official viewpoint at least, were
safeguarded from the rigours of inflation. This did not mean the end of
a market economy - far from it: but it did mean that over a large part of
the economy where the civil service and army had direct influence,
THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
105
money became mainly used for accounting purposes rather than also as
a medium of exchange and a means of payment of wages, taxes etc. Of
course the release of coinage from these official duties in a significant
part of the economy, mostly wholesale or large-scale in nature, actually
increased the supplies of money available for spending in the still largely
uncontrolled part of the economy, which was mostly but not solely,
retail. It is little to be wondered at then, that despite the economic
stability attained by Diocletian's system of budgeting and direct
rationing, prices continued their vigorous inflationary progress
unabated - or if anything, at an enhanced pace. The other side of the
coin is that although, in the circumstances obtaining under Diocletian,
an annual budget had to be combined with rationing, under different
circumstances, for example once a sufficiently plentiful supply of
reliable coinage had become available, the budget could function with
greater financial freedom - a position approached by Constantine and
later emperors, at least until weaknesses elsewhere wrecked the whole
system.
The fifth and final feature of Diocletian's integrated policy requiring
some attention is that concerning his general administrative reforms of
the army, civil service and provincial government. It was the peace and
security provided by these reforms that was basic to the recovery of trade
and the functioning of the rest of Diocletian's reforms. First, the size of
the army was considerably increased, and its structure reorganized.
Morale was improved when the requisitioning system was regularized,
which guaranteed the soldiers in real terms their standard of living and,
importantly, the differentials which had been squeezed in the inflationary
vices of the previous half-century. In order to carry out his detailed
census and his rationing and budgetary policies it was essential for
Diocletian also to increase the size of the civil service: according to some
estimates its size was almost doubled in the twenty-one years before his
abdication. Certainly complaints about the burden of taxes and the new
methods laid down for payment increased considerably during his reign
and for many years subsequently. As far as the reform of regional
government is concerned, one of the previous difficulties was the great
variation in the size, wealth and output of the various regions, some of
which were far too large for efficient administration, particularly given
the degree of detailed assessments required in the new fiscal system which
Diocletian's civil and military services were introducing. Consequently
Diocletian reorganized regional government, almost doubling the
number of provinces, and subdividing Italy itself into provinces. In order
to reduce the wanton destruction suffered in the peripheral areas from
barbarian attacks Diocletian relocated the army in strategic positions in
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THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
the frontier areas. Security, trade, fiscal and administrative reform thus
went hand in hand. Perhaps only in the two related features of his
currency reform and his prices and incomes policy did Diocletian fail, or
at least gain only partial and temporary success — but these very failures
caused him to reinforce the undoubtedly strong and lasting successes
achieved by his administrative improvements and, above all, by the fiscal
reforms for which he is mainly, and with justice, remembered. Diocletian
became one of the very few emperors ever to abdicate voluntarily when in
305 he retired to farm and build a palace in Spalato (Split). It is said that
when pressed by Galerius to return to rule rather than merely 'to grow
cabbages' Diocletian replied: 'Obviously, he hasn't seen my cabbages.'
Inflation always enhances land values and places cabbages and kings into
healthy perspective.
Finance from Constantine to the Fall of Rome
Shortly following Diocletian's abdication in 305 Constantine took over
an initially disputed control of much of the western empire in 306, and
eventually established his authority throughout the empire after exten-
sive and successful campaigns in Thrace, Byzantium and Egypt. The
first effect of these campaigns was to extend the twenty-one years of rel-
ative stability achieved by Diocletian for a further thirty-one years. It
was during his long reign that Christianity, from having been a perse-
cuted minority religion for nearly three hundred years, was made the
official faith in 313. One might at first think that his eastern conquests
and his conversion were not of much relevance to financial develop-
ments, but a little reflection will show that in fact both these events,
together with the encouragement to trade given by the long years of
peace and stable government, were directly related to the success of his
financial and economic policies.
Just like Diocletian, Constantine's first major decision in the
financial field was to reform the currency - or at least the higher-value
coinage. The small copper and grossly debased silver currency, by that
time known disparagingly as pecunia, appeared to have degenerated
beyond recall; but good-quality silver and pure gold coinage, known
respectively as argentum and aureum still commanded sufficient public
loyalty to be worth rescuing. Early in Constantine's reign he issued a
coin that is in some ways the most famous single coin in history - the
gold solidus, which was to be produced, at a rate of 72 to the pound
weight, for some seven hundred years. No other coin has remained pure
and unchanged in weight for anything like so long a period, for when
Rome fell it continued to be issued from the Byzantine capital, which
THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410 107
had been rebuilt in Roman splendour by Constantine. The choice of 72
solidi to the pound gave convenient subdivisions, of a gold semissis
worth half a solidus, and a gold tremissis worth one-third of a solidus.
Some experts, such as Blunt and Jones state that the solidus was 'not in
the full sense of the word a coin'. They argue this because it was
primarily issued for the convenience of the imperial treasury, and also
because its value in terms of non-gold subsidiary coinage was not fixed
but fluctuated from day to day as the inflation of the subsidiary coinage
proceeded at a fast but erratic pace. This argument appears however to
do less than full justice to the solidus. It was the other coins that in
effect were not coins in the full sense since the public had lost a great
deal of faith in them and yet had to make use of them, in the absence of
good-quality, small-value coins. That these exchanged with that
supreme coin, the solidus, at a fluctuating rate is not to be wondered at;
nor is the fact that the banks and money-changers would quote their
varying exchange rates for the solidus, day by day. In recent years we
have become used to the 'floating' pound, which is no less a pound by
reason of the fluctuations in its value as against other currencies. If one
thinks of the vast Roman empire as having horizontal divisions between
its main and its subsidiary currencies (instead of the vertical divisions
between countries which give rise to the floating exchange rates today)
then the acceptance of the solidus as a coin in every sense of the word is
more readily seen. The purity of the solidus was maintained by the
state's insistence on full-weight coins in payment of taxes, even though
it equally insisted on enforcing acceptance without weighing for the
private sector - an order with which the private sector complied all the
more easily because from Constantine's day onward, the imperial issues
were kept meticulously up to full weight and purity.
Supplies and precious metals in sufficient quantity to meet the
demands of the state and those of trade came from a number of sources.
First the eastern conquests of Constantine yielded a profitable surplus of
tribute. Secondly Constantine established a number of new taxes payable
strictly in gold or silver. Thirdly his agents operated compulsory purchase
orders at reasonable but fixed prices for gold. Fourthly what was the most
important source of all came as a direct result of the official conversion to
Christianity, which allowed Constantine to confiscate the enormous
treasures amassed over the centuries in the numerous pagan temples
throughout the empire. The result of this religious revolution was far
greater but in some ways similar to the financial effects of the dissolution
of the monasteries in sixteenth-century England.1 Indeed given this
massive new gold source, the three new types of gold coins began to
1 See pp. 194-7.
108
THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
become so plentiful as to make it possible for the state to begin to relax
the strict rationing inflicted by Diocletian as more and more of the
economy became serviced by coinage of good quality. Diocletian's gold
coinage had been rather too small to have a lasting effect. Armed with the
gold of the pagan temples, Constantine succeeded where Diocletian had
failed. Although, like Diocletian, Constantine also issued a reformed
silver currency, his degree of success in silver fell considerably short
compared with his famous solidi. The pecunia of debased copper and
silver-washed copper still existed in considerable volume.
Consequently despite the high quality of coins at the top of the range,
inflation was far from cured. In effect, the very considerable supply of
new good money, supplemented rather than supplanted the existing
supply and so in a perverse way added to the inflationary pressures during
and after Constantine's reign. In this connection it is important to note
that the imperial mints, both during and after Constantine, continued to
issue vast quantities of the old, grossly debased coins. Diocletian's edict
stipulated that a pound of gold was worth 50,000 denarii. By 307 gold
was worth 100,000 denarii; by 324 it was worth 300,000. In some parts of
the empire the inflation was even more astronomical. In these
circumstances the prestige and the value of the solidus continued to soar.
Possibly the record rate of exchange between the debased denarii and the
solidus is the figure of 30 million to one reached in mid-fourth-century
Egypt, at which reckoning, and discounting the premium attached to the
coin, a pound of gold was worth 2,120,000,000 denarii. Thus inflation
had brought the once proud silver denarius to dust.
Given the fact that the influential sections of the community - the
emperor, landowning senators, the civil service and army - could be
content with their appreciating land and gold currency holdings, the
empire struggled on. But the mass of the population, despite the degree to
which they were saved by their direct dependence on agriculture, could
not escape the disadvantages of inflation; and though the pace of inflation
was considerably reduced in the last quarter of the fourth century and the
beginning of the fifth, the damage had been done. Thus the barbarian
pressures were more easily able to achieve increasing success.
Economically it matters little whether we date the end of the western
empire with the fall of Rome to the Visigoths in 410 or extend it to 476
when the last Roman emperor, Romulus Augustulus was deposed in
favour of Odoacer the Barbarian. Of course, Constantinople continued in
some form for a further millennium, and, for most of that long period, so
did the solidus; a rather empty if glittering symbol of the old imperial
Rome.
THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
109
The nature of Graeco-Roman monetary expansion
From a few city-states in the north-east corner of the Mediterranean,
Greek and Roman monetary systems spread to cover almost the whole
of the non-Chinese civilized world. Contrary to the situation in our
modern world where the advanced economies comprise only a quarter
of the world's total population, it is probable that it was the most civi-
lized regions of the world that were not only the most prosperous but
also the most populous in the ancient world. In other words the new
monetary systems had a greater significance than might at first be sup-
posed in terms of the total numbers of people directly influenced. It was
the simple, concrete, anonymous nature of the new invention of coinage
which assisted its ready assimilation into the economic life of millions
of new users in the expanding Hellenistic and Roman empires. For the
first time in history 'money' mainly meant 'coins': all the more so since
in Graeco-Roman times coins performed not merely their modern func-
tion of supplying the small change of retail trade, but covered in
addition almost all the range of payments now performed by banknotes
and cheques. Coins followed - indeed accompanied - the sword;
payment for troops and for their large armies of camp-followers was
generally the initial cause of minting. Only the best was good enough
for an all-conquering army, and what was good enough for the army,
even if at first accepted through compulsion, was soon universally
accepted by everyone with alacrity. Although armies could always take,
or 'requisition', whatever they wanted, payment in good coinage was a
better way of getting eager co-operation. Consequently trade and, with
it, coinage, as the most convenient and most readily acceptable method
of financing trade, expanded in step with the armies of Alexander and
Julius Caesar.
If the spread of Greek, Macedonian, Hellenistic and Roman money
had had to depend solely on trade, the process would have been far
slower and far more limited in extent: it was military conquest which
forced the pace and extent of change. That is not to say, however, that
trade was unimportant in causing the adoption of Greek and Roman
monetary systems based on coinage: on the contrary, trade expanded
enormously as all roads and a large proportion of shipping, led to
Athens, Pella or especially Rome. Priority in causation may well have
been military conquest, and the maintenance of the army and of the
administration was always of considerable importance in the total
economy: but once the sword had initiated a novel or an expanded need
for coinage, commercial trade took over, added substantially to the
military needs and so became confirmed in its generally preponderant
110
THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
role. Despite the fact that the state, mainly through having to support a
large army and administrative machine, always loomed large in the
economic life of Hellenistic and Roman civilization, nevertheless the
market economy and the price system furnished the basis of a largely
private-enterprise system, with a high degree of specialization of
labour, dependent on an intricate network of trading in everyday
requirements as well as in luxuries, on a scale extensive enough to
guarantee that the large urban populations were adequately fed and
clothed, while enabling considerable numbers of its richer citizens to
enjoy a most enviable standard of living, at a level which few would be
able to attain until relatively recent times. It is not a question therefore
of either the army or trade being responsible for the establishment and
maintenance of the new monetary systems based on coinage. Both had
their interconnected roles to play, with the sword leading the way.
Without the security established by the sword, seen especially in the
four long centuries of the 'Pax Romana', trade would not have been able
to have basked in the peace and goodwill necessary for its un-
precedented growth and extent. Coinage enormously facilitated and
clearly symbolized the degree of imperial success in war and peace, in
conquest and trade.
Since the new money was the product of the sword the pace of
monetary expansion was naturally greatest during the last few decades
of the fourth century BC when the pace of Hellenistic advance was at its
height. As we have seen, the Persians learned about coinage when they
captured the Lydian King Croesus. Their attempts to conquer Greece
were thwarted when Athens, Sparta, Corinth and the rest managed to
turn from fighting each other to fighting the common enemy. Philip IPs
financial, economic and military preparations to advance against Persia
helped Alexander towards his astonishing successes which led to the
most rapid extension of any single monetary system in world history -
until the advent of the euro in 2002. As we have seen, the expansion was
more than simply geographical, for vast treasuries of precious metals
which had previously been unavailable for monetary uses were coined
for immediate use for military and more general economic purposes.
Although the easternmost sections of Alexander's empire were lost by
the time its Hellenistic remains were consolidated within the Roman
empire, Julius Caesar and his followers extended the uniform Graeco-
Roman monetary system over all of Gaul and most of Britain, though
here the sword followed and more strongly confirmed various imitative
coinage systems which had already to some extent been built up partly
by trade and partly by aggression by a number of warring Celtic tribes.
Thus in the thousand years between 600 BC and AD 400 the whole of the
THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
111
civilized world had become accustomed to coinage as the basis of its
monetary systems. At one time or other, between 1,500 and 2,000 mints
were busy turning out the coins required in the non-Chinese and non-
Indian areas of the civilized world.
However, when the impetus of growth gave way to the stagnation of
defence the nature of monetary expansion gradually began to change
also, from real growth to spurious, inflationary expansion. The Roman
desire for disciplined uniformity, though long successful, eventually
succumbed to the conflicting need to delegate administrative and
military decision-making (and therefore coin-making) to a number of
provincial regions and to the peripheral areas where fighting to defend
the vast imperial boundaries was endemic. Many mints producing from
a limited number of official imperial dies enabled uniformity to coexist
with decentralization, though with increasing difficulty. Currently,
expert numismatists have been unable to decide in a significant number
of instances whether the coinage dies in a number of provincial centres
were truly 'official' or just very good imitations, undiscovered or
possibly condoned by the local administration who would often gain
power, prestige and of course literally money thereby. Numismatically
the problem of official versus unofficial dies is a matter of considerable
importance, although from the economic point of view the real concern
is the degree of acceptability of the coins. The very fact of imitation
indicated that the demand for money locally exceeded the official
supply, a gap which the counterfeiter exploited directly for his own
interest and indirectly and more importantly for influencing the
economy as a whole; for good if trade was otherwise being inhibited,
for evil if the increased unofficial supply simply fed an existing general
inflationary oversupply of money. The better the imitation, the wider
was the actual or potential extent of the currency of the counterfeit
coinage. Furthermore, as official debasement proceeded apace, so the
metallic costs and the workmanship costs of counterfeiting were
reduced, encouraging the unofficial supply to be more readily expanded
and so multiplying the force of the officially-induced inflation.
Although the Romans had frequently reduced the size of gold coins,
i.e. increased the number coined from a given weight and moreover tried
to pass off the reduced weights at their former values, they generally
avoided debasing their gold in the sense of alloying gold with less
precious metals; and from Constantine onwards they re-established the
purity and stability of their gold coinage. They reserved mixed-metal
debasement for their silver coins, reducing many to mere silver-washed
bronze or copper coins, with the thinnest of silver coatings. However, an
economy cannot live by gold alone. The destruction through
112
THE DEVELOPMENT OF GREEK AND ROMAN MONEY, 600 BC-AD 410
debasement and inflation of the monetary media in which most retail
trade was necessarily conducted, and which involved by far the greatest
number of transactions for by far the greatest number of the people,
progressively weakened the economic basis of the Roman empire. Thus
although it was the barbarian invasions that brought about the fall of
the empire, the main underlying cause was the chronic economic and
financial chaos suffered in the fifth century, the product of excessive,
unproductive expenditure on defence and welfare. European unity
disintegrated as and when its uniform currency disappeared, never again
to be re-established not even by the Holy Roman Empire - which, as
Voltaire remarked, was neither holy, nor Roman, nor an empire.
Significantly, at the end of the twentieth century a single currency was
again seen as the essential ingredient in European unity.
As for Britain, from being part of a vast empire with a currency of
relatively high quality produced from a limited number of carefully
controlled mints, she became isolated and undefended from about the
year 410 onward. With the Romans went their peace, their order, their
language and their coinage.2 But elsewhere as the Dark Ages began to
cast their deepening shadows, the memories lingered on. Each warring
tribe and city-state attempted to combine defence or conquest with the
universally understood symbol of power and trade, its own coinage.
Painfully, from the disintegrated remnants of imperial power and
finance, new tribal, and eventually, national currencies were to emerge
involving not only former Romanized but also 'barbarian' or primitive
tribes. Subsequent to the Graeco-Roman extension of coinage the most
important, simple, single test of whether an economy is 'primitive' or
'civilized' lies in whether or not it used coins.
After the end of the Roman empire in the West, the primitive, newly
emerging peripheral kingdoms had first to learn or relearn how to coin.
Then, 1,000 years later - and at least 3,000 years later than the advanced
banking system of Babylon — they had once again to learn for themselves
the significance of banking, being ignorant of the earlier foreign models.
This time the further development of banking in a more advanced
monetary system was not impeded by the supremacy of coinage, and in
process of time coinage began to occupy a place of progressively
diminishing importance. In the very long mean time the penny and the
pound, as coin and unit of account respectively, became the main focus of
financial concern for the rulers of medieval and early modern Britain.
2 Roman coins are still emerging, adding significantly to our knowledge. In 1994 near
Bridgend, about ten miles from today's Royal Mint, some 1,400 coins were found,
dating from Diocletian's reign. In 1999 by far the largest hoard of Roman coins ever
found in Britain, comprising 9,377 silver denarii, was discovered near Glastonbury.
4
The Penny and the Pound in Medieval
European Money, 410-1485
Early Celtic coinage
Before tracing the rise of the penny and the pound sterling it is
convenient to look briefly at the development of early Celtic coinage, a
generally neglected subject the importance of which has been
overshadowed by the money of imperial Rome. Peripheral in every sense
of the word to the Graeco-Roman coinage system were the many
mainly imitative coins produced by the Celtic tribes along the northern
and western borders of the Roman empire. The coins of the Celts had
been in existence for a century or more before their lands, extending
from Finisterre in Spain, through Gaul and southern Britain, to the Elbe
in Germany, became incorporated in the Roman empire. This area of
north-western Europe experienced three coinage phases between the
middle of the second century BC and the seventh century AD. First came
two centuries or so of recognizably indigenous coins based mainly on
the Macedonian coins of Philip II and Alexander and later those of the
Romans. Secondly, the middle period lasted some 400-500 years, when
the greater part of the regions concerned was conquered by Rome,
when Roman coinage was predominant and when the previous
indigenous, and usually inferior, coinage was discontinued. In effect,
the periphery was pushed several hundred miles north. In the new, more
distant peripheral regions some indigenous Celtic coinage was still
produced, though far less distinctively Celtic, being hardly more than
copies of the dominant Roman coins which circulated in their own
kingdoms as well as within the vast empire to the south. Thirdly there
came a period of 300-400 years following the break-up of the Roman
empire in the West when new types of coinage patchily re-emerged in
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THE PENNY AND THE POUND
the previously Celtic countries which meanwhile suffered the shocks of
barbarian invasions. It was during this latter phase, after Britain had
endured two generally coinless centuries, that the early English penny
eventually made its appearance. In contrast to the headlong decline in
the quality of coined money in the disintegrating Roman empire of the
West, coins of the highest quality continued to be produced
uninterruptedly in parts of the eastern empire based on Constantinople
for over seven centuries. In north-west Europe the barbarian invasions
led to a marked reduction in the quality and in the quantity of coined
money, with Britain's economy as an interesting extreme case being
reduced to a prolonged period of barter.
Traditional historians have tended to overlook the role played by
Celtic coinage in the early history of British money. Since Celtic coinage
was to a considerable extent simply crude imitations of that of
Macedon and Rome, why should it claim our attention? However, as
D. F. Allen has emphasized, firstly, 'it is in Britain that all the streams of
western Celtic coinage converge' so that much of Celtic monetary
development is seen in concentrated form in Britain. Secondly, 'no other
surviving Celtic remains illustrate more vividly the life and thoughts of
our insufferably quarrelsome but superbly imaginative forebears' (1980
25, 41). Surely these are sufficiently telling reasons for examining briefly
the involved, incomplete and often confusing history of Celtic coinage.
There are two other reasons, one negative, one positive, but both
equally compelling. The negative reason is perhaps most easily
captured in the simple question: what other evidence is there? It so
happens that there is a marked paucity of written evidence, and what
exists is of doubtful reliability. On the other hand literally hundreds of
thousands of Celtic coins have been found, mostly on the Continent,
where hoards of up to 40,000 coins have been discovered. In a number
of instances we have learned of the existence of certain rulers only
through their representation on their coins (though some are spurious).
Although the evidence presented by coins is copious, it may
nevertheless be confusing in that forgeries, imitations and migration
may make it impossible to fix the place of minting and the region of
currency with any precision. Similarly with dating: unlike our coins,
dates were not generally indicated on early coinages. For instance the
first date on English coins did not appear until 1548 in the reign of
Edward VI, and with the Roman numerals MDXLVIII.
The copious and concrete evidence of coins is therefore not always
either as obvious or as exact as might first be supposed. The
interpretation of the plentiful and durable evidence given by coins is
therefore a difficult matter, involving painstaking work over many
IN MEDIEVAL EUROPEAN MONEY, 410-1485
115
years. Fortunately British and other numismatists involved in the study
of early northern European coinage 'have reached a very high standard
in their identification of individual coins and in the scientific analysis of
coin hoards' (Thompson 1956, 15). Unfortunately, in contrast with the
propaganda that was such a revealing feature of Roman currencies,
many of the Celtic and early English coins were sparing in their
inscriptions, so that they do not yield as much information as that
customarily provided by Roman coins.
The most plentiful of the earliest Celtic coins in north-western
Europe and the earliest found in Britain were of pure gold, being direct
imitations of the gold stater of Philip II of Macedon, with the head of
Apollo on the obverse and Philip riding his chariot on the reverse. It
may well be that some trading connections, e.g. with the early
Phoenicians, may have brought southern Britain into sporadic contact
with the eastern Mediterranean. But the spread of knowledge of such
coinage is more generally held to be the result of migration and in
particular of the use of Celtic mercenaries by Philip and Alexander.
Given the high value of gold coinage, the military influence in
originating the spread of such coinage was therefore almost as
important in Celtic as in Graeco-Roman financial history. In the same
way that the aggressive military ambitions of the Macedonian, Persian
and Roman armies were largely responsible for multiplying their coins,
so also did such wars stimulate coin production by their 'barbarian'
enemies. As Daphne Nash, an expert on Celtic coinage, has recently
confirmed: 'In every area, wars with Rome provoked unusually high
levels of coin production to pay for armies and associated expenses'
(1980, 77). Britain was probably the last of the major Celtic areas of
northern Europe to begin to mint, and was the last to maintain
independent minting before being overwhelmed by Rome. The last of
what may be strictly called 'Celtic coinage', as distinct from later coins
produced in still largely Celtic-speaking countries, thus came to an end
by the middle of the first century AD.
The earliest date given for Philip's stater in England in Seaby's
standard catalogue is 125 BC. Thereafter independent minting
continued until AD 61 (Seaby and Purvey 1982, 1). As well as gold, silver,
bronze and 'potin' were also coined by the Celts. As their confidence
grew, so did the independence of their designs, which no longer were
simply imitative. The Celts were a pastoral people, so the horse is a
strongly favoured design. As Celtic town life developed, so the quantity
of their coinage increased very considerably, particularly of alloyed
silver, bronze and copper-tin alloys, showing that trade was growing
and becoming the main purpose for coining. At the same time the
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THE PENNY AND THE POUND
quality of the gold and silver coinage, in weight and purity, declined
with the increased output. The Celtic love of hunting is also given
prominence in the boar designs favoured by the Iceni of East Anglia,
and as farmers they also gave tribute to the fertility of East Anglia by
prominently depicting ears of wheat, similar to that on modern French
coins.
The Iceni in East Anglia, the Cantii of Kent, the Atrebates of
Hampshire, Surrey and Sussex, and the Dobunni of the Midlands and
south-west were the most prolific coin-makers of Celtic Britain between
about 75 BC and AD 61. In the latter year, after the Iceni's revolt under
Queen Boadicea had sacked London and Colchester, killing some
70,000 Romans, Celtic independence, and with it Celtic coinage, over
most of southern Britain was extinguished when Roman authority was
restored. Thereafter England became absorbed into the Roman
monetary sphere. From time to time, usurping kings marked their
ambitions in the usual way by issuing their own coins, and the rarity of
such occasions is indicated by the enormously inflated prices quoted in
Seaby's catalogues. Thus whereas the catalogued price, in 1982, of a
good Celtic copy of a Philippian gold stater, was £500 and an Iceni
boar-head or horse coin fetched only £45, the gold and silver coins of
the usurping kings commanded far higher prices. The gold aureus of
Victorinus (268-70) was priced between £3,500 and £10,000; a
Carausius (287-93), who minted his gold in London, would fetch
between £7,500 and £17,500; while the gold solidus of Magnus
Maximus (383-8) was priced at between £2,750 and £8,000.
Whereas the numismatist and, even more, the ordinary coin
collector, may invest great significance in rarity, the economist must
express far more interest in the mundane, common and everyday
coinage. Of particular interest in this connection are the 'potin'
currencies that became of especial importance on the Continent, but
also spread to southern England in Celtic times. The composition of the
'potin' coins varied with tribe and locality, but their basic similarities
derived from, first their cheap method of manufacture, secondly their
'token' nature, thirdly their small size and fourthly, related to all three
previous aspects, their purpose in meeting the ordinary needs of small-
value trade. Various combinations of copper and tin, probably
dependent on the cheapness and availability of the raw materials,
formed the most common metals used for this currency, which was very
plentiful in Gaul before it was conquered by Julius Caesar. Potin coins
continued in circulation into the first century AD. They were also
common in Kent and circulated at least until AD 43.
Instead of being struck or hammered, as were the dearer coins in
IN MEDIEVAL EUROPEAN MONEY, 410-1485
117
silver and gold, the potin coins were cast. They may first have been cast
individually, but to meet the growing demand for this popular form of
everyday money, a method of casting in fairly long strips was developed.
Since their intrinsic value was low in comparison even with the debased
and imperfect struck coins of gold and silver and their alloys, it is
probable that they circulated as tokens, accepted for trade at a higher
value than their metallic worth. No great skill was required in their
manufacture and it is quite possible that the ubiquitous Celtic smiths
were therefore able fairly easily to supply local demands to supplement
the official issues. Although Roman coinage displaced the Celtic
varieties, the small 'minissimi' coins produced towards the end of the
Roman occupation of the Celtic lands served a somewhat similar
purpose to the earlier 'potin' coins.
Money in the Dark Ages: its disappearance and re-emergence
When the Romans arrived in Britain they found a Celtic-speaking
country, as were the majority of its peasants when they left - or left
Britain to its own fate - in 410. Even before that date Germanic
mercenaries had been imported by the Roman authorities into Britain
in fairly large numbers. Gradually thereafter the Roman language, the
relatively new Christian religion and Roman coinage ceased to influence
the life of the people. In practice the pace of the attenuation of Roman
influence varied with the raids, invasions and settlements of the Angles,
Jutes, Saxons and Friesians. The Anglo-Saxon Chronicle gives the
traditional date of 449 for the first landing in Kent by the brothers
Hengist and Horsa. At any rate it is clear that from about that time the
number of the invaders' settlements grew, spreading from the south-east
over most of England during the following century, changing the whole
country from Romano-British to Anglo-Saxon, from Christian to
pagan, from relatively urbanized to a pattern of deserted towns and
rural settlements, and from a thoroughly monetized economy based on
a uniform coinage system, to a backward economy where coins first
became scarce and then, with surprising speed, disappeared completely
from circulation.
The disruption accompanying the decline and fall of the Roman
empire was nowhere more marked than in Britain, where the term 'the
Dark Ages' therefore carries special significance. Given the increased
insecurity of life and the disruption of trade and social contacts, the
burial of treasures for reasons of safekeeping was a natural and
common reaction. There was a remarkable increase in the hoarding of
coins in the late fourth and early fifth centuries up to around 440. The
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fact that these cluster in the south-west 'suggests that the accumulation
and burial of these hoards should be a Romano-British phenomenon' -
a sort of retreating frontier attesting the advance of the early Anglo-
Saxon armies (C. E. King 1981, 11). Whereas on the Continent Roman
influence on language, laws and coinage continued to exert a weakening
but still pervasive influence, the break between island Britain and
Roman civilization was far more complete and the disruption through
wars and invading settlers much more marked. Britain reverted,
suddenly in some areas and fairly quickly everywhere, to a more
primitive, less urbanized, moneyless economy. This most significant
and rare example of a virtual reversion to barter for as long as around
200 years by a country which had known, used and produced coins for
nearly 500 years remained a matter of dispute among the experts for
many years. However, the authoritative, painstaking and monumental
researches of experts like Professors Spufford, Grierson and Blackburn,
among others, have removed any lingering doubts about the total
collapse of coinage and currency in Britain and the contrast this showed
with the situation just across the English Channel.
Thus Professor Spufford emphasized the fact that after the Roman
army left 'no further coin entered Britain and within a generation, by
about 435 AD, coin ceased to be used there as a medium of exchange.
Not for 200 years . . . were coins again used in Britain as money' (1988,
9). Similarly Grierson and Blackburn state that 'Britain was the only
province of the Roman Empire where the barbarian invaders brought a
complete end to coin production and monetary circulation for almost
two centuries' (Grierson and Blackburn 1986, 156). The Continent
managed to maintain a degree of continuity in customs and coinage.
The contrasting discontinuity in Britain meant that not until the
seventh and eighth centuries (despite a false dawn in the sixth century)
did she relearn how to use and make coined money, and then only in
painfully slow stages. Thus the monetary use of either existing or
imported coins probably ceased in the generation following 430, while
only in the generation preceding 630 did Britain, and then mainly in the
south-east, begin slowly to accustom itself once more to the gold coins
imported from across the Channel.
The Canterbury, Sutton Hoo and Crondall finds
In examining the origins of the 'penny' we must first look at when coins
of any kind were first minted in Anglo-Saxon England, and then tackle
the question of which type of indigenous coin might first legitimately be
called a penny. English indigenous 'coinage' had a possibly abortive
IN MEDIEVAL EUROPEAN MONEY, 410-1485
119
birth in Canterbury in the last few decades of the sixth century,
although only in recent years has the nature of the birth or abortion
become clear. The traditional origin of English coined 'money-like
objects' is said to begin in about 561, after the marriage of the Christian
Merovingian Princess Bertha with Prince Aethelbert, who became king
of Kent in 590. Bishop Liudard, who came with Bertha to Canterbury,
minted a number of gold 'coins' shortly thereafter. However, when
these Canterbury 'coins' were critically examined it appears that they
were more in the nature of medallions, including a necklace of 'coins',
more for ornament than for use as currency. In 597, heartened by the
welcome shown to the Christian religion in Kent, Pope Gregory the
Great - allegedly stirred also by the sight of the young blond, blue-eyed
English prisoners in Rome ('not Angles but Angels') - dispatched St
Augustine to Canterbury. According to Sir John Craig, London, too,
'accepted a Bishop and gained a mint between 600 and 604' (1953, 4).
Bishop Mellitus issued gold coins from the London mint from about
604 for a dozen years to 616.
Since Christianity and coinage had disappeared from England
together it seemed highly appropriate and unsurprising that it became
widely accepted that they also returned together. However, the
researches of Professors Spufford and Grierson show these early
mintings to be a false dawn. 'In the larger part of England coin did not
circulate as money [even as late as] the eighth century, having spread
very slowly from the south-east from around 630' (Spufford 1981, 41). It
was from the gradual rebuilding of commercial and cultural contacts
with France and Italy that Anglo-Merovingian types of coinage
gradually began to circulate for commercial purposes in south-east
England. According to J. D. A. Thompson, 'the presence of
Merovingian and Byzantine gold pieces in various parts of the country
points to a resumption of commercial intercourse with Europe long
before 600 and to a widespread acceptance of the East Roman solidus
and the Merovingian tremissis as a convenient trade-currency' (1956,
xviii). In the light of more recent research Thompson's timing appears
premature. Christianity, trade and coinage did, however, grow faster
and earlier in the south and east of England than in the rest of the
country and prepared the way for a more general acceptance of both the
cross and the coin during the seventh and eighth centuries. Still later on
in northern Europe the influence of Christian missionaries in
persuading Nordic rulers to issue their own coined moneys is
indisputable (Spufford 1988, 83).
The re-entry of coinage into England in the sixth and seventh
centuries repeated in certain respects the pattern of its original entry
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some 600 years earlier. In both cases the original coinage was of gold,
then of gold and silver alloys. In both cases it was natural that our
nearest neighbours across the Channel should have been responsible for
the circulation of coins which were the object of our initial indigenous
imitations. In the first century BC it had been the Celtic Belgae, in the
sixth and seventh centuries AD it was the Merovingian Gauls who first
taught the inhabitants of south-east Britain how to use and mint coins.
However, the Anglo-Saxons were not quite ready in the early seventh
century for the full acceptance of either Christianity or coinage.
Whatever limited issues may have come from the London mint in the
first two decades of the seventh century soon ceased as the backsliding
Londoners reverted to paganism after 616.
In unravelling the tangled threads of early English monetary history
the following three factors have been found to be of critical importance.
First the Sutton Hoo hoard found in a ceremonial burial ship near
Woodbridge, Suffolk in 1938; secondly the Crondall hoard found at the
village of that name in Hampshire as far back as 1828 but the subject of
much recent research; and thirdly the patient researches of Grierson,
Spufford, Blackburn, Kent, Oddy, Sutherland, Dolley and other experts
on Anglo-Saxon coinage, which have enabled us to improve our
interpretation and especially the dating of the coins found in these and
other similar hoards. The Sutton Hoo ship, buried in about 620 to 625,
contained no English coins. Most of the Crondall hoard of 101 gold
coins, relating to the 630s and 640s - the precise date is still, as we shall
see, in dispute - had, however, undoubtedly been minted in England. Of
the original Crondall hoard, three have been lost. Of the remainder
eighteen are Merovingian, nineteen are Anglo-Merovingian copies
minted in England, fifty-two are Anglo-Saxon both in type and
minting, three are blanks, while the other six are of mixed provenance.
Despite the fact that some 1,200 Roman hoards have been uncovered in
Britain, such as that at Beachy Head in 1973 which unearthed 5,540
Roman coins, early Anglo-Saxon coin finds are so rare that the positive
evidence of the Crondall hoard remains of the utmost importance.
Somewhere between 620 and 650, probably from about 630, a date
confirmed by a number of other smaller finds, England had begun
again to mint her own coins, now in moderately significant amounts for
general circulation and for trade, and not simply for gifts or decoration.
Among the many rich treasures found in the Sutton Hoo ship was a
bejewelled purse containing some thirty-seven gold Merovingian coins
(plus three gold blanks). Unfortunately only one of these was readily
identifiable by bearing the ruler's inscription, the Frankish King
Theodebert (595-612). Tentatively the date of 650 became generally, but
IN MEDIEVAL EUROPEAN MONEY, 410-1485
121
not universally, accepted as the burial date. However a number of
numismatists, including Jean Lefaurie in France and Dr John Kent of
the British Museum, doubted the authenticity of this date. Dr Kent and
his assistant Dr Andrew Oddy, a physicist, carefully devised a method
of dating Merovingian coinage which could be applied to the Sutton
Hoo, Crondall and other finds, based on the fact that Merovingian gold
coinage became progressively debased with silver during the seventh
century. They very carefully tested the specific gravity of some 900
Merovingian coins, and by combining the results with base-reference
coins, the dates of which were already established beyond doubt,
derived a time-scale against which all other Merovingian currency
could be assessed. As a result of this painstaking and scientifically
based research, Dr Kent came to the firm conclusion that the mint date
of the latest coin found in the Sutton Hoo ship was between 620 and
625 (see Brown 1978).
The economic and financial significance of the Sutton Hoo find
should not be based narrowly or exclusively on its foreign coins, but
rather the richness and widespread origins of its luxuries should also be
taken into account. These would seem to indicate that by the first half
of the seventh century Britain's trading links with the Continent had
again become of significant proportions. Gold and silver ornaments of
the finest craftsmanship, extending in geographical range from the
Celtic west to the Byzantine east, are to be seen in the burial ship.
Furthermore if a relatively unimportant and almost unknown East
Anglian ruler (probably King Raedwald — but the matter is disputed by
the experts) could command such wealth, fully comparable with that of
any contemporary Germanic prince, then the early Anglo-Saxon
standards of living, at least in and around the courts, were not nearly so
crude as has often been assumed. F. M. Stenton considered the evidence
of the Sutton Hoo find sufficiently clear on this point at least to
conclude that it was 'in every way probable' that the eastern silver had
come to England 'through trade rather than plunder' (1946, 52). The
Sutton Hoo find therefore suggests that the rudimentary foundations of
a trading, coin-using economy, though at first dependent on foreign
coins, were being laid down in southern and eastern Britain early in the
seventh century, while the Crondall find further confirms the progress
made in trade and payments, using indigenous as well as foreign coin,
as the century progressed. As to the relative importance of such trade as
compared with tribute, gifts or other ways of stimulating the issue and
exchange of coins in the Dark Ages, we are still very much in the dark.
Some authorities, such as Grierson, insist that 'alternatives to trade
were more important than trade itself (Grierson 1979, 140). However,
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from the point of view of the development of a coin-using economy
both trade and its alternatives, such as ransoms, tributes and payments
to mercenaries, acted together as complementary and self-reinforcing
inducements to extend the currency of coinage.
The somewhat negative evidence of the Sutton Hoo hoard stands in
contrast to the positive evidence of the mixed Anglo-Merovingian coins
of the Crondall hoard. Carried to its extreme, the Sutton Hoo evidence
simply proves that there were no Anglo-Saxon coins in that purse: it
does not prove that there were none anywhere else at the same time,
although in the absence of other significant and undisputed finds, Dr
Kent, like most other experts, considers that this is probably the case.
He therefore attaches much more importance to the positive evidence of
the Crondall hoard which points to the probability of a significant
Anglo-Saxon gold coinage circulating from about 630 and continuing
until about 675. This summary of the main schools of thought
concerning the origins of English coinage demonstrates that the
financial history of the Dark Ages is still very much a live issue. In 1980
Dr Kent reaffirmed that 'the first English coinage is known almost
entirely from the Crondall hoard' which 'seems to date from the 630s'
(p. 129). This is earlier than the date given by Grierson and Blackburn.
The view of the latter authorities is that 'not until the 630s and 640s
was coin production sustained in England and it is this phase which is
represented in the Crondall Hoard now dated to c.650 or a little earlier'
(1986, 161). The gap between the various schools regarding the birth of
English coinage has thus been narrowed from an unbridgeable seventy
years to a now generally accepted couple of decades at the most.
The main denomination of the coins found in both the Sutton Hoo
and Crondall finds consisted of what English numismatists have called
the 'thrymsa', derived from the tremissis or one-third of the gold
solidus, and about one-sixth the weight of a modern English sovereign.
Once the new gold thrymsa had established itself its gold purity began
to be reduced. We have seen how the gold content of the Merovingian
coinage became progressively debased with silver from the early part of
the seventh century onward - a pattern frequently repeated. The same
process occurred at a later date but at a faster pace in England. Rapidly
from about 675 onward the early English coinage was replaced by silver
as the main metal. This marked an important step on the way to a
wider circulation and to the adoption of the silver penny as the age-
long trademark of English currency.
IN MEDIEVAL EUROPEAN MONEY, 410-1485
123
From sceattas and stycas to Offa's silver penny
Gold was too scarce and too precious a metal in England and France to
be used as the basis of a rapidly expanding monetary system. As it
happened, the rejection of gold in favour of silver was a most propitious
development, for Britain, unlike Byzantium, lacked the considerable
supplies of gold needed to maintain the output of coins in sufficient
amounts to meet the increasing demands of government, Church and
trade and in denominations low enough to be suitable for an extensive
coverage of commercial interchange. Thus the original gold currency of
Anglo-Saxon England lasted barely seventy years, for from about 675
the gold issues first became alloyed with silver and then early in the
eighth century gave way almost completely to silver, supplemented for a
time with a subsidiary coinage of brass or copper. Even so, the various
rulers of the different regions of a still disunited England issued silver
alloyed with inferior metals to the extent of up to 50 per cent or more
for a century after 675 - and in Northumbria until 867, when Osbert
was defeated by the Danes. Eventually a handsome penny of good-
quality silver supplanted all other rivals in the kingdom of Kent in
about 765 and was being extended all over England, except
Northumbria, until the wholesale disruption caused by the Viking
invasions and the settlements in the Danelaw interrupted the political
and financial unification of England.
The most substantial issues of the first half of the seventh century
have been - erroneously - known as 'sceat' or, in the plural, 'sceattas'.
The term originally meant 'treasure', similar to the present German
'Schatz' and the even more similar Danish 'Skat'. Although it is, strictly
speaking, an error to use a word which was purely a unit of account to
refer to a specific coin, the habit has become so ingrained in modern
scholarship that it would be rather too pedantic not to conform to the
custom. For this reason the term 'penny' is not generally applied to the
sceat currency but reserved for later issues of a distinctly different type
of coinage. Compared both with the previous thinnish gold coins and
the later pennies, the sceat was typically dumpy, thick and small in
diameter rather like the modern short-lived decimalized halfpenny but
twice as thick and of course very much cruder. As with the gold
currency, sceats were issued not only by royal but also by a number of
ecclesiastical mints, especially York and Canterbury.
The sceattas varied greatly in type and purity. As with the previous
gold coinage, relatively few of the sceattas originally carried the name
or head of the king. The designs became more thoroughly and
confidently indigenous, and less like mere copies of Roman or
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Merovingian coins. A most popular series were the 'porcupines' while
others carried imaginary designs such as that known by numismatists
as the 'fantastic animal'. Other common types of design consisted of
'whorls', 'wolves' and 'serpents'. The lettering of some of the early
Anglo-Saxon coins was made in the Runic alphabet; some show mixed
Roman and Runic writing while some later types copy Arabic designs,
including at least one series with the script written backwards. The
names of bishops rather than kings occur occasionally, while the
importance of the officially appointed 'moneyer' is prominently
displayed in name, abbreviation or other mark. The degree of
debasement varied not only in time but geographically, with the
northern half of the country generally having a higher proportion of
debased silver and crude bronze or copper coins, although the London
mint also produced heavily debased issues. The smallest of these
debased sceattas, issued for a century or more in Northumbria, were
termed 'stycas'. While the numismatists might possibly - and the
collector certainly - decry the degree of debasement that produced
these stycas, the economist welcomes them as evidence of the degree of
penetration of coinage among the population and as clear proof of the
increase of the coinage habit.
It was during this period, from the sixth to the ninth centuries, that
the traditional seven kingdoms of England, the so-called heptarchy, of
Kent, East Anglia, Essex, Sussex, Suffolk, Mercia and Northumbria,
became forcibly merged under the overlordship of the kings of Mercia
in the south and Northumbria in the north, the latter being itself the
product of a previous merger between Deira and Bernicia. This process
was inevitably accompanied by a much more uniform monetary system
and a more obvious assumption of regal authority for coinage, with the
suppression of the right of subsidiary authorities, whether regal or
ecclesiastical, to coin money. The head and name of the king therefore
began regularly to replace the previous anonymous and ecclesiastical
issues, while the prominence given to the names of the moneyers and
their mints was reduced, but, luckily for the numismatists, not
eradicated.
The true silver penny, then, is quite distinct from its precursor, the
sceat. In fact, to produce these fine new, broader, thinner coins capable
of registering finer details, without damage, something that had not
previously been possible in Anglo-Saxon coinage, required much more
highly skilled minting techniques. This most significant change in
Anglo-Saxon coinage took place during the reign of Offa (757-96),
although the first of the pennies that he was to make famous, was not in
fact produced by him. Offa, having secured his western flank by
IN MEDIEVAL EUROPEAN MONEY, 410-1485
125
constructing the impressive Dyke along the Welsh border, enlarged his
native kingdom of Mercia so that he eventually became overlord of
much of western, central, southern and south-eastern England,
including Kent. Just like many of the previous monetary innovations,
the penny was based directly on the new 'denier' produced in Paris by
Pepin the Short from around 752, and adopted by his famous son,
Charlemagne. The quality of the English product, however, soon
became markedly superior to its continental counterparts. Once again,
the first to imitate the new French coin were the still independent kings
of Kent; first Heaberth in 765, followed by Ecgbert in 780. The first true
English penny, though initially produced only in Kent, almost certainly
at the Canterbury mint, thus dates from 765. However, it was Offa's
conquest of Kent and his canny take-over of the three Kentish moneyers
Eoba, Babba and Udd, whose skills had produced the first pennies, that
enabled Offa so to increase the production of these magnificent coins
that their fame soon spread all over northern Europe - even if
Northumbria still stuck stubbornly to its sturdy sceattas and cheap
stycas. Sir John Craig gives some telling examples of the popularity of
the English penny:1
When Boguslav the Mighty founded the coinage of Poland, he copied
English designs so literally that coins for the steppes of Volga and Don bore
the names of Aethelred I, then king of England, and of a London minter.
English pence were the first models of Denmark, Sweden and Norway; they
were reproduced in the evanescent coinage of Dark- Age Ireland, and their
imitation in the Low Countries and Lower Germany became a nuisance to
England in more sophisticated times. (1953, 7)
From being merely the clumsy pupils, England's moneyers had now
risen in prestige to become unconsciously but in effect the masters of
minting in northern Europe. The penny came in with a bang.
Consequently it seems much more appropriate to associate the true birth
of the 'penny' with the precision and prestige of these new coins rather
than to ascribe the term vaguely to an indefinite number of relatively
unknown issues of 'sceats' produced a hundred or so years earlier by
Penda, Ine and other relatively unimportant rulers. The term 'penny'
had of course been used for a century before Offa. One of the earliest
references occurs in the laws of Ine, king of the West Saxons from 688
until 726, when he resigned the cares of kingship to retire to Rome,
rather as certain present-day rulers of less developed countries
occasionally retire, whether voluntarily or not, to Bath, London or Paris.
1 Though this remained peripheral to the more widespread Carolingian currency of
the nascent but nebulous Holy Roman Empire.
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THE PENNY AND THE POUND
Penda, king of West Mercia (632-54), appointed his son Peada as prince
of part of his realm. Pada, a Kentish moneyer, whose name is promin-
ently impressed in Anglo-Saxon and in Runic characters on his coinage,
may also have added to the folklore which attributes the term 'penny' to
a particular person. Indeed it has been customary for a number of
contemporary authorities to repeat the claim that the very word 'penny'
is derived from Penda, just as the early Irish pennies were called
'Oiffings' after Offa. But the power and prestige of Offa and his coins
were far greater than that of Penda. One may doubt whether Penda's
influence could in reality account for the fact that variants of the term
penny occur during this period in the languages spoken across almost all
of north-western Europe, including Germany and Scandinavia. The
widespread use of the term seems more likely to have come from a
common element in producing all the numerous crude coinages emerg-
ing across northern Europe in the Dark Ages, namely the 'panning' of
coins, when pouring the molten metal from crucibles into the 'pans'
required either for casting or for the blanks of hammered coins.
The very wide linguistic use of the 'penny' thus probably
corresponded more readily with its method of production than with the
obscure personality of a West Mercian ruler. 'Penig', the old English
word for penny, compares almost exactly with the Friesian and Dutch
equivalents, and with the Danish word for money in general, which is
still 'Penge'. This, like the German 'Pfanne', from which Pfennig is
believed to stem, refers to the pans which were then essential for coining
money ('Penge, from Old Danish "penninge", diminutive of "Pande" =
a pan'). Whether the Penda or the panning theory is really the true
linguistic origin is unlikely to be resolved to the complete satisfaction of
the protagonists. It may well be that the two elements reinforced each
other. In any case the progress of Anglo-Saxon coinage from the crudity
of Penda's sceattas to the relative splendour of Offa's penny marked a
revolution in our monetary history and established the penny as the
only English coin (with relatively rare and unimportant exceptions) for
500 years subsequently. Money and penny thus became practically
synonymous throughout most of the Middle Ages.
Offa greatly enlarged the quantity of money produced in his domains,
and for this purpose increased the number of his moneyers from three to
twenty-one. There were also another nine moneyers known to be
producing coins elsewhere in England. Estimates of the total resulting
'money supply' vary considerably, even though, unlike today, all the
experts agree on what should be included in the total figure. Before
briefly examining the apparently eternally controversial question of the
money supply we may pay tribute to the extraordinary vitality of Offa's
IN MEDIEVAL EUROPEAN MONEY, 410-1485
127
experimentation and designs. He is the only English king to have issued
a coin bearing the name and bust of his consort, Queen Cynethryth (a
custom of some Roman emperors), and it was Off a who made the
upside-down Arabic inscription on his golden 'dinar'. In the end,
however, as we have seen, it was his own indigenous designs for his silver
penny that became the model for others to copy (Blunt 1961). According
to estimates by Dr D. M. Metcalf, the thirty moneyers at work in
England in Offa's day used some 3,000 dies on some '30 tons' of silver to
produce between '30 and 40 million' coins (Metcalf 1980). These
probably excessive preliminary estimates were later reduced to allow for
considerable recoining and for the heavier weight of the new pennies,
which would reduce the required total of precious metal proportionately
below 30 tons to perhaps 6 tons net, and also reduce the number of coins
in question. A very much lower estimate, frankly admitted by Dr
Grierson as simply the intelligent guesswork which even the best of such
figures is bound to be, put the total of Offa's output as probably not
exceeding a million, or at the utmost, two million, arguing that what
really controlled the supply of money was the actual demand for it. Dr
Grierson also expressed some doubt as to whether, outside Kent,
London, East Anglia and southern England, the use of coinage was as
yet very extensive (1979 chapters 15 and 16).
While there might thus be considerable room for argument as to the
quantity, there could be none regarding the quality of Offa's coinage -
and even with regard to the quantity there can at least be no gainsaying
that it had shown a very considerable growth. Indeed, the essential
point to grasp in this early contest in trying to quantify the supply of
money, is not the differences between the estimates, but rather that, for
the first time in Anglo-Saxon history, the quantities involved millions of
new silver pennies rather than merely thousands or tens of thousands of
'sceats'. Each of these new pennies would command values much higher
than we might at first assume. Offa was undoubtedly supplying the
necessary currency on a most substantial scale, and thus laying the
foundations of a money economy. Furthermore, unlike so many
previous occasions, the substantial growth of the new currency was not
at the expense of the quality of the coinage. In short, Offa's place in the
development of our monetary economy has been aptly summarized by
Sir Albert Feavearyear thus: 'The continuous history of the penny
begins with the coins struck by Offa (and) the history of the English
pound begins with the history of the English penny' (1963, 7). 2 The
ability that Offa had demonstrated, of rapidly increasing the quantity
2 See also D. S. Chick, 'Towards a chronology for Offa's coinage', The Yorkshire
Numismatist, 3, 1997.
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of coins of a superior standard, was soon to be repeated by later
monarchs in minting the still larger quantities of money needed to arm
themselves against the Vikings and in their vastly expensive attempts to
buy them off.
The Vikings and Anglo-Saxon recoinage cycles, 789-978
Perhaps the most telling way to summarize the enormous impact of the
Vikings on English monetary development is to state the simple fact
that far more English coins have been found in Scandinavia than in
England relating to the most active period of Viking raids. The first of
these raids took place in 789, shortly before the death of Offa in the
next year. The first raids, such as those on Portland in 789 and on
Lindisfarne in 793, were small, isolated and sporadic affairs but
thereafter they grew gradually in intensity and, beginning with the
arrival of the 'Great Host' in East Anglia in 865, changed their nature to
permanent invasion, immigration and settlement. As a result of this
process of settlement the newly coalescing national state of England
again became divided, into a roughly northern and north-eastern
'Danelaw', and a more or less independent kingdom of central,
southern and south-western England. The two kingdoms lived in
uneasy rivalry with each other until, after a new series of more vicious
raids, a stronger national unity was achieved incorporating the whole of
England, and for a short time much of Scandinavia, in the generation
before the Norman Conquest. The reunification of England prior to its
conquest by Gallicized 'Northmen' from the south, is inseparably
connected with the story of its coinage, developments in the latter
shedding considerable light on the course of the more or less continual
armed conflict, or costly preparations for engaging in or avoiding such
conflict, in the period between 789 and 1066.
Although no part of Britain remained immune from Viking
invasions, whether directly from Scandinavia or indirectly from Ireland,
Scotland or France, it was the kingdom of Wessex which first saved
itself and then acted as the example to inspire a more widespread
resistance without which all England would have been submerged by
the Danish settlers. It is for this reason that Alfred is usually considered
as one of the greatest of the long line of English monarchs. Effective
defence was - and always seems to be - a most costly business,
necessarily involving much increased minting of money. Given the
mobility of the Danes on land as well as at sea, Alfred was faced with
an immense problem. He first reorganized the system of occasional
levies in order to keep an army reserve constantly in the field. The
IN MEDIEVAL EUROPEAN MONEY, 410-1485
129
unfortified or poorly fortified townships which had previously provided
the Danes with easy pickings were repaired or fortified for the first time
so that outside the Danelaw there was built a ring of well-defended
burghs which were regularly maintained and garrisoned. Alfred's
donations to the Church, his generous sponsorship of artists and
writers and his constant endeavours to improve educational standards,
added to the greatness of his achievements - and to some extent to the
demands for finance. There is good reason to believe, says Stenton,
'that the origin of the burh as a permanent feature of a national scheme
of defence belongs to the reign of King Alfred' (1946, 289). In addition
Alfred earned his title as 'father of the English fleet' by building a
number of large ships to try to deny to the Danes their previous
maritime supremacy.
The heavy financial burdens required to support his improved system
of national defence on top of his other expenditures were very largely
met by payments in kind. These were based on customary assessments
of the ability of the locality to pay, according to the size and wealth of
the community, based on land units, the smallest for such tax purposes
being the 'hide'. In course of time the hides became consolidated into
'half-hundreds' and 'hundreds'. The exigencies of war could not be met
by simply living off the land, but in addition put a premium on liquidity,
so that as the conflicts with the Danes increased in intensity, so did the
number and output of the mints. The same pressures led to increased
coinages within the Danelaw also, with the London mint, for instance,
alternatively active under both Saxon and Dane. The fact that the
Danelaw generally adopted the penny as their unit of account and
means of payment and very largely used the same mints that had
previously produced the coins required in northern England made
possible much commercial exchange in the peaceful intervals between
armed conflict. However, as Professor Loyn has shown, the antiquated
'thrymsas' in Northumbria and the Scandinavian 'oras' in much of the
Danelaw initially created 'some difficulty in achieving a satisfactory
monetary standard in the new Anglo-Scandinavian world' (1977, 128).
However, such difficulties were relatively short-lived as the English
pennies issued to pay increasing tributes of Danegeld flooded the
Danelaw.
Alfred began the process of increasing the number of mints to at least
eight, most of these being within the protection of his newly fortified
burghs, such as Exeter and Gloucester. In addition, the older mints at
Winchester, Canterbury and London were pressed into more active
service, producing, as well as the standard penny, for the first time in
English history, the minting of a halfpenny. The latter custom died out
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after Edgar's reign despite the fact that there appeared to be an
appreciable demand for halfpennies as being more convenient than the
common practice of having to cut pennies in half. That such a demand
existed would appear to have been proved by the many imitations of
Alfred's halfpence produced primarily in the Danelaw where their
unofficial minters would more easily escape punishment. Alfred also
minted a number of heavy silver coins which, according to Dolley and
Blunt, are 'without parallel in the coinage of Western Europe' (Dolley
1961, 77). These may have been intended as 'sixpences' or, possibly as
papal payments; hence their having been dubbed 'offering pieces' by the
numismatists.
Alfred's successors, including especially Athelstan and Edgar, found
it necessary to increase the number of mints still further in order to
supply the increasing demands for coinage for purposes of war, tribute
and trade. Both Athelstan and Edgar made significant contributions to
the development of English currency. By means, partly of conquest and
partly of alliances, Athelstan (925-40) managed to make himself
effective overlord of all England and of the greater part of Scotland. His
achievements in this direction were rather overambitiously celebrated in
a coin claiming himself as 'King of all Britain'. He increased the number
of mints to thirty and continued the practice, which had now become
more of a necessity than a convenience, of indicating the name of the
mint as well as that of the moneyer. Obviously the increase in the
number of mints carried with it a danger of loss of royal control unless
this was expressly guarded against.
It was in order to make such control clear and explicit that Athelstan
enacted the Statute of Greatley in 928 specifying a single national
currency. Such a national currency had been approached from the days
of Offa. Athelstan's conquests and his vision combined to enshrine the
concept in law and to confirm the importance of coinage in the national
system of taxes, trade and tribute. Thus England became the first of the
major countries of Europe to attain a single national currency in post-
Roman times. However the renewed incursions of the Danes postponed
the uninterrupted establishment of this principle until 1066. Even so the
achievement of a uniform national currency in England preceded that
of France by more than 600 years, and of Germany and Italy by nearly
900 years: a factor perhaps in Britain's instinctive reluctance to embrace
a single European currency today.
The uniformity declared as a policy objective by Athelstan was
brought still nearer to reality by Edgar's thoroughgoing reforms. Edgar,
959-75, is generally known as the Pacific since he managed to preserve
the peace unbroken for sixteen years - no mean achievement in the
IN MEDIEVAL EUROPEAN MONEY, 410-1485
131
circumstances. In financial history he is best known for two related
features: firstly for his reform of the nation's coinage, and secondly for
setting the precedent for a more or less regular cycle of recoinage, both
aspects being taken up more thoroughly by later rulers. The years of
unaccustomed peace appeared to be highly convenient for making sure
that the variety of silver pennies in circulation of slightly differing
weights and considerably differing designs, should all be recalled and a
new uniform currency reissued. For this purpose Edgar increased the
number of mints by the year 973 to forty and, by carefully controlling
the issue of dies and strictly regulating moneyers, assured a coinage of
uniform type and standard. Having once achieved uniformity, he soon
saw that it would be necessary to repeat the operation from time to
time, and this for four main purposes: first to ensure that the quality of
the coinage was maintained; secondly to enforce his express 'legal
tender' order that 'no one was to refuse acceptance'; thirdly to benefit
from the profits associated with reminting; and fourthly to assert the
royal prerogative over minting and prevent unauthorized competition.
It may well not have been Edgar's original intention in 973 to institute a
regular six-year cycle of recoinage but in fact such a cycle ensued,
becoming shortened to three years or less by a number of subsequent
monarchs, who greedily milked its fiscal benefits to the utmost.
Danegeld and heregeld, 978—1066
Aethelred IPs long and unhappy reign (978-1016) began inauspiciously
with the murder of his half-brother Edward and the renewal of Danish
invasions on a gradually increasing scale. His name, literally 'noble
advice', went so ill with his character that he became known, with sick
humour, as the Unready, from his stubborn refusal to take good
counsel. He was not of course the first to attempt to buy off the Danes,
but his reign marks the climax of this self-defeating policy. He already
possessed an administrative and financial machine able to deliver
promptly the vastly increasing tributes demanded. An instance of this
took place in 991 when he paid over to the leader of the Danish invaders
some 22,000 pounds of gold and silver, in addition to payments already
made by local rulers. When it seemed as if peace might at last be
possible, he ordered the massacre of all Danish men in England on St
Brice's Day, 13 November 1002. Although his orders were only partially
obeyed, their obvious effect was to strengthen Scandinavian determina-
tion to conquer all England.
To meet this threat Aethelred relied rather more on the power of his
seventy-five mints than on his army or navy. Edgar's 'invention' of
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regular recoinages was now put into full effect by Aethelred who
introduced seven changes of coinage type in his 38-year reign. When
coupled with a not-too-obvious reduction in the weight of the penny
this policy enabled the number of coins in circulation to be increased
and yet be accepted internally at face value. At the same time 'by
devaluing the penny in relation to its continental (bullion) rate, the
government was able to discourage imports, encourage exports,
improve the balance of trade and cause silver to flow into the country'
(Dolley 1961, 154). With so many mints operating throughout the
country no man outside the Danelaw had to travel more than about
fifteen to twenty miles to find a mint to change his old for new coins.
Simply to pay the Danegeld Aethelred had to coin nearly forty million
pennies. Of some ninety known mints, as many as seventy-five were in
use at the same time.
Since a considerable proportion of these coins naturally found their
way to Denmark, Norway and Sweden, it might at first appear that
England itself would have become practically drained of coins - but for
a number of good reasons this was not so. The speed with which
Danegeld was paid certainly meant that a proportion of the payments
was almost certainly passed straight on after being collected by taxes
without any recoinage being involved. Yet the total quantity of money
remaining in circulation in England appears to have been just as large at
the end of the period of most rapid Danegeld payments between 980
and 1014 as in the beginning, although no doubt there were
considerable, if temporary, regional imbalances of surpluses and
deficits from time to time. However, recent authoritative research
confirms that 'in the long run virtually all the silver that went out of
England as Danegeld was matched by similar quantities that had come
in from overseas' (Metcalf 1980, 21). Despite the repeated and
intermittent wars, trade was substantial, steadily increasing and, for
reasons already indicated, favourable to Britain, allowing a consider-
able influx of silver from the Continent. European silver was in any case
becoming more plentiful since a large new silver mine was opened at
Rammelsberg in Germany's Harz Mountains. Its output became
diffused by trade and mercenary payments all over northern Europe.
According to Professor Sawyer 'the location of the main English mints
is consistent with the hypothesis that the main economic activity lay in
the east and that the silver came from abroad' (1978, 233). A vast
recycling operation was thus taking place in northern Europe during
the last half of the tenth and first half of the eleventh century, with
tribute being the major component in the first period but with trade
becoming increasingly important in the second. In 1012 Aethelred
IN MEDIEVAL EUROPEAN MONEY, 410-1485
133
raised additional taxes payable in coinage and specifically earmarked
for paying mercenaries to man a new fleet of ships and a larger army, its
military purposes being clearly indicated in its description, the
'heregeld', literally 'army-debt'. This nationwide tax, 'yielding perhaps
£5000-£6000, was a powerful means of drawing cash out of every
village' (Metcalf 1980, 23). However, Aethelred's reign was effectively
drawing to a close, since in 1013 he was forced to seek refuge in
Normandy, where after further ineffectual battles and intrigues, he died
in 1016. The concept of the heregeld did not however die with him but
was put to more effective use by his successor.
Cnut (1016-1035) first paid off his vast invasion army and fleet, but
maintained a standing army in England while he expanded his
Scandinavian empire, the handy and prolific heregeld being again used
for this purpose. Since the disbanding of the invasion force alone cost
some twenty million pence, the mints were almost as active from time
to time under Cnut as they had been under Aethelred. The pressures on
the mints from the necessity of producing the vast coinages associated
with repeated Danegeld and heregeld payments led to successive
reductions in the average weight of the penny, from a high weight of 27
grains at the beginning of the tenth century to 18 grains in the early
eleventh century. After the heregeld was (temporarily) abolished in 1051
the penny regained a weight of 21 grains. It was obviously increasingly
difficult to maintain the customary high standard of the English penny
during the first half of the eleventh century.
On his accession Cnut's declared intention was to rule the reunited
England according to its customary laws, and he used the efficient
existing embryo English civil service for this purpose. Later, in a letter
from Rome to his English subjects, he claimed, 'I have never spared, nor
will I ever spare, myself or my labour in taking care of the needs of my
people' - a promise that he carried out to an extent such as to justify his
appellation, 'the Great'. His similarity to Alfred may be seen in his
encouragement of education, his generous endowment of churches, his
draining of the fens, and his building of bridges. Trade expanded
considerably under his 'free-trade empire' which extended over most of
Ireland, Scotland, England and Scandinavia, and accounted for a rising
proportion of the still growing demand for coinage. The more settled,
peaceful conditions of his reign allowed a greater concentration of mint
output in the seaports bordering the North Sea, so that over 50 per cent
of the total coinage produced in England was minted in London, York
and Lincoln. Numismatic evidence for this period is derived mainly from
Scandinavia rather than from Britain, with the mint marks enabling us
to assess, approximately at least, the rate of activity of the various mints.
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The information given by these Scandinavian hoards is of a mixture of
English coins of various types usually found together with coins from
France, Germany and Scandinavia. If the English coins found in these
hoards had been merely the result of the massive Danegelds they would
most probably not have been so varied but would have consisted more of
long runs of uniform issues. The actual degree of variation and
admixture is held by most authorities to indicate trade, rather than
plunder or tribute, as the usual source of such hoards, even if the original
cause of issue may admittedly have been tribute or plunder. Modern
numismatic researches would therefore appear to confirm the views of
those earlier historians like Sir Charles Oman and of later authorities
like Professor Sawyer that trade flourished whenever peaceful oppor-
tunities occurred. Thus according to Oman 'the immense quantities of
Cnut's silver pennies that survive bear witness to active trade . . . there is
every sign that by the time his reign ended the whole land was in a very
flourishing and satisfactory condition' (1910, 601).
The death of Cnut in 1035 saw the break-up of his empire and a new
period of political and financial confusion. The 24-year rule of Edward
the Confessor (1042-66) failed to restore the stability enjoyed under
Cnut. Edward appeared to have instigated, or at least allowed, a rare
case of debasement in 1048 when the normally pure, if sometimes
lightweight, silver penny contained an admixture of zinc and copper.
The moneyers were kept almost as busy as ever with seventy mints active
and ten separate coin-types issued during his reign, again confirming
that the six-year cycle of Edgar had been reduced for fiscal reasons to
somewhat less than three years. His efficient administrators saw that his
life's ambition, to build a new church at Westminster, was completed
just before his death. The same efficient civil service then became busy
issuing the new dies for the new coins, designed for Harold II, which
were being produced by forty-five mints as he marched around the
country during his brief reign, from his victory at Stamford Bridge to his
defeat at Hastings. 'Perhaps nothing shows more eloquently than this
the degree of efficiency which the royal administration had by now
attained in its central control of the wide net-work of English mints'
(Sutherland 1973, 39). The contrast with England's coinless economy of
the Dark Ages could hardly be more complete.
The Norman Conquest and the Domesday Survey, 1066-1087
Traditionally the Battle of Hastings has rightly been seen as one of the
great turning points of British history, although long familiarity with
this old-fashioned view has recently bred a degree of critical contempt.
IN MEDIEVAL EUROPEAN MONEY, 410-1485
135
To all intents and purposes the millennium of invasions which had
disrupted Britain before the Norman Conquest was now ended and,
with just a few relatively minor exceptions, Britain thereafter has
remained free of foreign invasions. Peace within the country was,
however, very much more difficult to achieve. Rebellions, baronial and
civil wars, minor skirmishes of all sorts remained sufficiently
widespread to engender recurrent feelings of insecurity among the
people for some 500-600 years after 1066. A price had to be paid for
freedom from the perilous insecurities of war, whether external or
internal, this price being the restrictive formalization of the system of
land ownership, work, tithes and taxes known as feudalism. Although
the Norman Conquest resulted in a strengthening of an already nascent
feudalism in England, it did not originate it, for a number of its most
distinctive elements had already been developing in the century or so
before 1066. The Conquest did usher in a far more complete, a far more
standardized system of feudalism, especially in a legalistic, political and
administrative sense, than had previously existed in England and it did
so at a considerably faster pace than would probably have taken place
had Harold, rather than William, been the victor on 14 October.
To William it seemed of vital importance to the legality of his claim
(to be the rightful ruler of England) to date his accession as having
taken place on Friday 13 October, the day before victory. This
apparently trivial point indicated the thoroughness of the Norman
approach to legal matters. The Conquest provided the opportunity,
seen by William also as an absolute necessity, of reinforcing his legal
authority by insisting that all his vassals should formally retake their
oaths of allegiance in the course of which their rights, feus and duties
were more clearly and explicitly defined. The legal and administrative
forms of feudalism were more advanced in Normandy than in
contemporary England, and it was therefore natural that the influx of
Norman rulers would bring with them their more ingrained and more
explicitly legalized new attitudes and habits. Furthermore, after the
Conquest - and more especially after William's devastating harrowing
of the North following a series of rebellions between 1069 and 1071 -
there was no danger of any revival of the division of England into two
nations, the Anglo-Saxon and the Danelaw. The Norman Conquest
therefore meant that England never again became divided
geographically but was united in a far more common form of
administration than had previously been the case - although the
Norman system was in fact modified in various ways by the survival of
Anglo-Danish institutions. Nevertheless there is considerable truth in
the view that the Normans transformed England from a vague and still
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somewhat divided feudal society into an administratively integrated
feudal system.
Whereas military and political changes can take place suddenly, and
while administrations can also on occasions be modified relatively
quickly, changes in the economic life of a nation are generally
impossible to achieve except by a process of relatively slow evolution,
particularly when, as was the case throughout the Middle Ages, the
great mass of the people worked on the land. For them the Conquest
appeared at first to be almost irrelevant, and continuity, rather than
change, best sums up their situation. However, given the greater
formalization of land ownership and of feudal duties, and also given the
diffusion of coin-using habits, the impact of the new Norman system of
administration gradually affected life in the rural areas as well as in the
towns. Since coinage was such a personal prerogative of royalty,
William had the undoubted power of bringing about, had he so wished,
the kind of drastic changes in England that he had already made in
Normandy, where the profits derived from his debasement of the
coinage had helped to finance the invasion of England. However
William saw the wisdom of taking the advice offered to him by his
feudal council that he should resist the temptation of debasing his
English coinage, especially when the finance sacrificed thereby was
more than made up by the imposition of a new tax, in the usual form of
a land tax, promised expressly to avoid debasement. Subsequently,
throughout the Middle Ages the English monarchy maintained the
quality of its silver coins to a far higher degree than was the case with
most continental coinages, though whether this was the unmixed
blessing it is often assumed to be will be debated later.
We are of course enormously indebted to William I for the most
complete record of national wealth and national income undertaken by
any country in the Middle Ages - the 'Description of England'. This
was ordered by William and his Great Council at Gloucester, Christmas
1085. The whole of the comprehensively detailed survey was carried out
with such thoroughgoing vigour that it was completed by the end of
1086. The summaries of these incredibly detailed statistics were
collected in a few volumes (two major volumes plus a few regional
summaries, e.g. for Exeter, Cambridge and Ely), which soon came to be
known as Domesday (or Doomsday) Book, so called because there
could be no appeal against such an authoritative, meticulously detailed
and publicly corroborated, quantitative and qualitative survey. As the
ordered description of a national economy it is unique among the
records of the medieval world' (Stenton 1946, 648). With two
unfortunate and major exceptions, namely the four northern counties
IN MEDIEVAL EUROPEAN MONEY, 410-1485
137
of Northumberland, Durham, Cumberland and Westmorland, much of
which had been devastated by William himself and therefore had little
to contribute to his coffers, and the towns of London and Winchester,
the wealth of which may already have been well known, information
was collected from every county, town, hundred and village.
The investigation was conducted by commissioners, assisted by the
king's representative or 'reeve' in every shire - the sheriff - together
with juries selected locally. The survey was thus a combination of a
legal, demographic and most importantly financial, fiscal and
economic investigation whereby the position and numbers of the more
important persons were described, and the output and taxable capacity
of the kingdom were evaluated. Altogether some 283,242 persons were
mentioned in the survey, which would give an estimated total
population of between about 1,375,000 as a minimum and about
1,500,000 as a maximum. It counted all farm livestock (such as cattle,
sheep, pigs, etc.), the acreage, potential and actual yield of the arable
lands, the number and ownership of plough-teams, other 'capital'
equipment such as productive woodlands, fish ponds, beehives and so
on. 'Not a single hide, not one virgate of land, not even one ox, nor one
cow, nor one pig,' says the Anglo-Saxon Chronicle, 'escaped notice in
this survey' In towns, which were already of considerable importance in
Norman times, the smithies, bakeries, breweries, markets, fords, mills
and royal mints, were all meticulously recorded. The yield from tolls,
taxes and fines of various kinds were all carefully aggregated.
No other European state at that time possessed such a sound basis
for fiscal and financial assessment (what today we would call
'budgeting'), or for supplying the means for reasonably efficient and
equitable decisions regarding taxation, coinage and farm management,
which were then the main ingredients of monarchical economic policy.
The king could now know with a degree of certainty whether he was
pressing too hard on some localities, the taxable capacity of which had
fallen, or too lightly on others, the taxable capacity of which had risen.
There are numerous examples of such adjustments, no doubt rough and
ready but nevertheless significant, having been made on the basis of the
Domesday evidence. Here again the Normans created a national system
of taxation on the foundations of the various regional systems which
had been previously developed by the Anglo-Saxons and Danes so that,
as in coinage, England was probably the first post-Roman state in
western Europe to develop a uniform nationwide fiscal system.
The king's finances were derived mainly from five sources: first,
directly from the proceeds of his own estates, the 'Crown lands';
secondly, from regular customary and therefore normally fixed
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payments made by the shires and boroughs; thirdly, from the fines and
other fluctuating profits resulting from the maintenance of justice;
fourthly, the mostly arbitrary profits from issuing the king's dies and
minting the king's coins; and fifthly, in order to meet exceptional
expenditures, a general tax on land, the 'geld', of which, as we have
seen, the Danegeld and heregeld were the most famous examples. It
follows that the greater the yield of the first four sources, the fewer and
the less heavy would be the exceptional gelds. Despite his improved
administration, William himself found it necessary to levy five gelds
during his 21-year reign. Because the gelds were usually very heavy and
were paid in cash, they had a close relationship with the demand for
coinage. Furthermore it becomes clear that only an efficient tax-
gathering system could guarantee that the quality of English coinage
would be maintained - an early English example of how fiscal and
monetary policies are necessarily interwoven.
Domesday Book gives a detailed picture of the basis on which the
gelds were assessed. Although the details vary from region to region the
most common basis for assessment was the 'hide'. Originally the hide
comprised an amount of land which one team of eight oxen could
manage to plough in a season, an amount which naturally varied as
between hill and dale, light or heavy soils. Long before the Conquest
the hide had become standardized at about 120 acres. One of the
motives generally held to have given rise to the survey was to discover
hidden 'hides' in order to give a clearer picture of taxable capacity and
to reduce tax evasion. For tax farming purposes the hides in each
'hundred' were grouped into fives or tens, except that in the customary
Danelaw regions the old 'wapentakes' were divided into districts,
roughly comparable with the 'hundred', and further subdivided into
blocks of a dozen or half-dozen hides. In fiscal affairs therefore the
Domesday survey showed that the Normans continued to use the
Anglo-Saxon and Danish customary dues and assessments and
gradually modified them into a uniform national system. The output or
yield of each locality investigated by the survey was given for the year of
the Conquest and for the year of the survey, so that a picture of local
growth or decline, and an aggregate, if vague, glimpse of what we might
describe as 'national income growth' over a twenty-year period may be
derived from the Domesday evidence. As well as those two base and
reference dates, the income and output of a series of different
intermediate dates, namely whenever the land concerned changed its
feudal ownership, was also given. All in all, the actual and the potential
revenue of the land available for the use of the king's government was,
among a wealth of other details, provided for the first time in the
IN MEDIEVAL EUROPEAN MONEY, 410-1485
139
history of Britain, a legacy available for use for two or three centuries
by William's successors. Having thus standardized the fiscal system it
was therefore all the more appropriate to standardize the monetary
system also: a task easier said than done.
The pound sterling to 1272
So far as the penny, and therefore the pound also, were concerned the
Norman Conquest spelt continuity rather than change, and stability
rather than revolution. Apart from introducing a number of Norman
moneyers, especially Otto the Goldsmith as chief moneyer and die
master, no alterations of substance were made to English coinage
during the reigns of the first two Williams (1066-1100), except that
during the reign of William I the weights of the penny were if anything
higher on average and less variable than were those issued in the
generation before the Conquest. Some thirteen different coin types were
issued, eight ascribed to William I and five to William II, thus indicating
that the average pre-Conquest cycle of between two and three years
between recoinages was being imitatively followed, a royal custom that,
with some interruptions during the anarchy of Stephen and Matilda,
was maintained until about a century after the Conquest, that is until
the coinage reform and the ending of the regular series of short cycles
brought about by Henry II in 1158. William I is known to have operated
fifty-seven mints, details of over fifty of which are given in the
Domesday survey. The survey shows how the privilege of minting was
costly for the operators but lucrative for the king. As Sir John Craig
shows, the average payment exacted by the king was £1 per annum for
each moneyer, with an extra £1 payable every time the coin design was
changed, that is, at least every three years (Craig 1953, 20). On average
each mint town had three moneyers, but some had ten or more. William
II similarly made use of fifty-eight mints, including a new mint at
Totnes. In both reigns, given the average 31-month cycle, the mints were
kept busy most of the time. It was obviously a lucrative business, dear to
the heart of the monarch, and also to any counterfeiter.
The high quality established by William I and generally maintained
by William II fell away drastically during the long reign of Henry I
(1100-35), and even more so in the short 'reign', if it can be called that,
of Stephen (1135-54). Henry I introduced fifteen new types in his 35-
year reign, thereby reducing the coinage cycle from the previous level of
thirty-one months to about twenty-eight. With the rare exception of
one or two of these types they were of extremely poor quality and were
therefore more easily clipped and copied. Most of Henry's coins were
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impure, light in weight and of execrable workmanship. Among the
reasons given for this decline in quality are, first an influx of poor
quality 'pennies' from the Continent which made it easier at first to
accept lower-quality indigenous issues. Secondly, the death of Otto the
Goldsmith removed from the scene the favourite, most strict and most
widely travelled mint-master upon whom the first two Williams had
relied in keeping not only the London but also the provincial mints up
to scratch. Henry did, however, attempt two major reforms, though
their beneficial results were short-lived. The first, in 1108, included
plans for issuing halfpennies, but the inadequate cost allowance made
to moneyers for producing two coins together equal in value to the age-
old single penny coin inhibited their production. The issue flopped, and
only one such coin appears extant in today's collections.
So impure was the current coin and so untrustworthy were the mints
that it had become the widespread custom to cut a small snick into the
coin in order to test whether it was genuine silver through and through
or only silver-plated. This then led Henry to the ridiculous decision in
1112 to make an official snick extending to almost half the diameter of
all his coins before they were issued, though this official idiocy was
happily not carried into the subsequent revisions. By 1124 the quality of
all the existing coins had again deteriorated so much that the English
Chronicle tells of someone who managed to secure acceptance of only
twelve of the nominal pound's worth of 240 coins that he took to
market. Public confidence having been completely destroyed, the king
looked for a public scapegoat. All the mint-masters in the kingdom,
then numbering between 180 and 200, about the same number that
operated in William the Conqueror's day, were summoned to the Assize
of Winchester, on Christmas Day 1124, and a number of them — some
accounts give a total, probably exaggerated, of ninety-four - were
punished by having their right hands chopped off. (At least they were
spared the stiffer penalties of being blinded or castrated or both, which
were occasionally administered.) Even this drastic remedy produced
only a temporary improvement, with the last three issues of Henry's
reign being as bad as ever.
The bitter and destructive Civil War during 1138 to 1153 between the
rival supporters of Stephen and Matilda made an already bad situation
even worse. 'It was the only time in English history that the royal
prerogative of coining money was set at nought by powerful barons'
who issued their own currencies and so contributed to the downward
slide in the general quality of the coinage (Thompson 1956, xxix).
Whereas the blurred inscriptions of Henry's coinage had been the result
of shoddy workmanship, in the case of a number of rival minters in the
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141
Civil War the blurring was apparently intentional, to avoid identi-
fication and so escape punishment from the other side. Even some of
the better-quality coinage was deliberately and literally defaced when,
following a quarrel between Stephen and the pope, a number of mints
issued coins with two ugly, indented lines across Stephen's head. The
use of coins as propaganda in warfare was obviously not a lost art.
The breakdown in the usual channels of distribution of bullion to the
mints during the Civil War made local mints much more dependent on
local supplies and so stimulated production from the silver-lead mines
of the Mendips which supplied Bristol, Exeter, Gloucester and other
mints in the south-west. The Derby, Nottingham and Lincoln mints
were similarly supplied by the mines at Bakewell in the Peak District,
while silver and lead mines at Alston in Cumberland supplied the
Carlisle mint. The fact that speed of production during the wars was
more important than the degree of refinement of the ore played its part
in the drastic fall in the metallic purity of the coinage and in the poor
quality of the minting. The financial history of the first half of the
twelfth century exposed the myth of the superior administrative skills
of the Norman rulers and gave fresh and forceful evidence of the
insecurity of life in Anglo-Norman England and the dangerously
fissiparous proclivities of its barons. The efforts of the first two
Williams to unite the country and to maintain the quality of its coinage
seemed to have been all in vain. For the ordinary person in the many
regions of Britain afflicted by the 'harrowing of the North' and the
arbitrary terror of the barons during the Civil War the Norman
Conquest might have seemed more like a relapse into barbarism than a
step forward into a new, orderly, well-administered feudal system. Yet,
within a relatively few years, Henry II (1154-89) had restored the
prestige and unity of the kingdom, greatly strengthened its finances,
and raised the quality of its coinage in such a way as to render
unnecessary the costly revisionist cycles that had typified England's
financial history for over two centuries.
Henry's first task was to restore royal power by destroying the
unauthorized or 'adulterine' castles that had sprung up during the Civil
War, and similarly by closing down a number of the provincial mints
that had previously supported baronial independence. Because of his
quarrels with the Papacy, and especially with Thomas a Becket, a
number of ecclesiastical mints including those of Durham, Bury St
Edmunds and Canterbury ceased operating for a number of years. Each
time Henry closed down a provincial mint he strengthened the relative
and absolute importance of the London mint and hastened the process
of concentrating the bulk of money making within the Tower of
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London. Furthermore by doing away with the triennial revision he had
no need to reverse his policy of reducing the number of mints but could
more easily manage to maintain a steadier output of coins from his
smaller total number of mints, except on the two occasions when he
carried out a general replacement of the whole currency, that is in 1158
and 1180, using some thirty and eleven mints respectively. Apart from
those two occasions he usually managed with half a dozen mints, with
London always being predominant. He further centralized his political
and financial control of his English kingdom by reorganizing and
strengthening the authority of his sheriffs in every county. His legal and
financial reforms went hand in hand, assuring him of a more certain
income, with fewer leakages than formerly, from the various fines, dues,
customs, taxes and crown estate revenues, uninterrupted by civil strife.
Little wonder that it was in this period that the first detailed description
of the administration of the English Treasury, the Dialogus de
Scaccario, and the first comprehensive treatise on English law, the
Tractacus de Legibus Regni Angliae, were written.
As the first of the English branch of the Plantagenets, Henry's vast
domains spread far beyond England, extending from the Pentland Firth
in the north to the Pyrenees in the south. To safeguard his empire he
needed an army available for continuous service. Rather than relying on
the customary military services of forty days owed him annually by his
tenants-in-chief with their retainers, he began insisting that these feudal
services should be commuted into a cash payment or 'scutage' (from the
Latin, 'scutum', a shield), a process as welcome to the barons as to
Henry's finances. With the proceeds Henry was thus able to build up a
more reliable and more mobile, permanent professional army of
mercenaries, or 'soldiers' as they became known thereafter, from the
'solidus' or king's shilling that they earned.
Having restored order and set in train his political and legal reforms,
Henry carried out a thorough reform of the coinage in 1158 to repair
the damage done during the Civil War. This new coinage is known
either as the 'cross and crosslets' from its design, or as the 'Tealby' issue
from the hoard of nearly 6,000 such coins found at the Lincolnshire
village of that name in 1807. (It is perhaps a commentary on official
vandalism that over 5,000 coins from the Tealby find were melted down
by the Royal Mint as scrap silver.) The name 'Henricus' remained
unchanged on English coins for 121 years, that is until 1279, throughout
the reigns not only of Henry II himself and Henry III but also those of
John, Richard and the first seven years of Edward I: a classic case of
what numismatists call 'immobilization'. In all that long period, there
were only three distinctive changes of type: the 'Tealby', introduced as
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143
we have seen in 1158; the 'short cross' in 1180; and the 'long cross' in
1247. Apart from very minor details these issues would remain
unchanged until the normal processes of wear and tear made a further
general recall and reform necessary. This indicates how completely
Henry II had broken with the old regular triennial revisionist tradition
which was never reintroduced. Henry's fiscal reforms including the
process of commutation of feudal dues, of which scutage was simply
the most prominent example, made excessive reliance on seigniorage
unnecessary. Henry's reform restored the prestige of English money, the
quality of which was jealously safeguarded from any further major
decline until the mid-sixteenth century. This was so unlike the situation
on the Continent that the term 'the pound sterling' emerged into
common usage with its well-known praiseworthy connotations.
The origin of the term 'the pound sterling' remained a puzzling and
controversial matter to experts, at least until the authoritative and
probably definitive treatment of the matter by Grierson in 1961 (see his
'Sterling' in Dolley 1961). He shows that although the earliest variant of
the term goes back to 1078 in the form 'sterilensis', it was not until the
thirteenth century that it appears as sterling, though 'starling' and
'easterling' also arise to confuse the issue. Both 'star' and 'starling' are
plausibly suggested by those who see the origin arising from various
designs of these found on early English coins. Less plausibly, some see
the powerful 'Easterlings' (international merchants and money-
changers) as parents of the term. It may be a misguided (but common)
failing to seek a single explanation for matters concerned with money,
which by its nature is inevitably among the most widely used of
artefacts. Consequently the term 'sterling', like money itself, may in fact
have a number of complementary origins. Grierson himself, despite the
very powerful case he makes for his own interpretation, modestly
admits room for doubt. Nevertheless he persuasively sees the origin in
the strength and stability of sterling as given by the key Germanic root
of 'ster', meaning 'strong' or 'stout', and the 'ling' as the corruption of
a common monetary suffix. Hence 'sterling' would be the natural
description for English money, which from the tenth century onward
tended generally to be of higher quality than that of its continental
neighbours, and therefore referred specifically to the penny coins
weighing 22 Vi grains troy of silver at least pure to 925 parts in a
thousand, 240 of which made the Tower pound weight or the pound
sterling in value. It is also significant to note that the term 'pound
sterling' was in common use throughout Europe in the Middle Ages,
with all its connotations of solidity, stability and quality - long before
the issue of a pound coin - when silver was almost the only metal used
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in British coinage and the penny was almost the only, and certainly the
main, coin. Indeed, it is the minting of the gold sovereign by Henry VII
which may be taken as a symbol of at least one of the many monetary
developments which marked the end of the Middle Ages. So long as
full-bodied gold and silver coins were issued in Britain, that is right up
to the First World War, so long did the term 'the pound sterling'
maintain its prestigious significance, that is for a period spanning well
over 800 years, from 1078 to 1914.
Touchstones and trials of the Pyx
Edward I (1272-1307) kept to the 'Henricus' long-cross issues for the
first seven years of his reign, by which time the state of the currency in
general had deteriorated so much because of ordinary wear and tear
that a general replacement was becoming overdue. Although the main
purpose of extending the crosses on the long-cross type right to the
perimeter of the coins had been in order to deter clipping, in this respect
it had not been a great success. After 1275, when Edward forbade the
Jews to exact usury, clipping increased and quality declined markedly.
(The Jews were again blamed and suffered wholesale arrests in 1278
and expulsion in 1290.) Edward, however, did far more than simply
issue a replacement coinage. He guaranteed for himself a place in the
history of English money by the very thorough nature of his reforms of
1279 to 1281, particularly by introducing three new denominations: the
halfpenny, the farthing, and the fourpenny-piece known as the 'groat'
as well, of course, as the traditional penny. Instead of having to rely
simply on a single denomination, there were henceforth four
denominations bringing far greater flexibility and convenience to the
monetary system. The increasing demand for low-denomination
coinage - copiously confirmed by the persistence of the habit of cutting
the penny in half or in quarters, at a time when a single penny was
worth a full day's pay or would buy a sheep - had been resisted
previously because, apart from the value of the metal, the cost of
minting a farthing was practically the same as that for minting a penny.
Edward overcame this difficulty partly by making over to the minters a
greater allowance, in effect sharing his seigniorage, and partly by
making the farthing slightly, but not noticeably, lighter in weight than
strictly a quarter of the weight of the penny.
This was the first time the groat (from the French 'gros') had been
issued in England and the first time 'Dei Gratia' appeared on English
coinage, the larger size giving more room for such an inscription.
Edward's reform marks the beginning of the regular and permanent
IN MEDIEVAL EUROPEAN MONEY, 410-1485
145
issues of the useful halfpenny and farthing, and although, as we have
seen, occasional issues of halfpennies had been made previously, these
all turned out to have been short-lived experiments. At the beginning of
the twelfth century King John (1199-1216) had produced a separate
design of pennies, halfpennies and farthings for Ireland, bearing his
own name, but these were not issued in England, where only the
Henricus short-cross type were issued. A similarly experimental but
abortive initial issue, this time of the first gold coins in medieval
Britain, appeared in 1257 when Henry III issued what he called a 'Gold
Penny'. This was part of a widespread new European fashion for gold
coins. Sicily and Italy, more closely under Byzantine and Arab influence,
started the fashion when gold coins were issued in Messina and Brindisi
in 1232; in Florence in 1252; and in Genoa in 1253. Of the three Italian
gold coins it was the Florentine variety, impressed with the town's floral
emblem, that coined a new name — the 'florin' — which became widely
imitated in Europe, significantly increasing the aggregate supply of
money.
Henry Ill's 'gold penny' was based on a simple 10:1 ratio of gold to
silver and, being twice the weight of the silver penny, therefore carried
an official value of twenty pence. However the issue failed, partly
because it was in fact undervalued but mainly because it was not
popular. There was insufficient demand to guarantee the widespread
acceptance of such a high-value coin in England. Not until almost a
century later was there a reissue of gold, this time by Edward III in
1343, and now called a gold 'florin'. This, at six shillings, turned out to
be overvalued, and was therefore replaced in 1346 by the gold 'Noble'
worth eighty pence, one-third of a pound or 6s. %d. Considering the
contemporary victory of the English at Crecy, it was aptly named and
designed, with its large ship on the obverse being a tribute to English
sea power in general and the contemporary Battle of Sluys in particular.
This time the ratio of gold to silver was just about right - but the
stability of this ratio lasted only for a decade or so. These early
difficulties associated with the introduction of bimetallism into Britain
were to recur at irregular intervals throughout the succeeding centuries.
Gold coinage in the Middle Ages was, because of its high value, of
concern mainly to merchants, especially those engaged in foreign trade.
Yet anyone who had occasion to handle coins of silver or of gold in any
volume, whether merchants, traders, tax collectors, the king himself,
the royal treasury, or the sheriffs, required reliable devices for testing the
purity of what passed for currency. The people in general benefited
indirectly from this deep concern by merchants and administrators,
which acted to bring about periodic reforms of the currency back to the
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official, legal standards. The two main methods used for testing purity
were as follows: one rather rough and ready device for judging coins
already in currency was the 'touchstone'; the other, as formal and
meticulous as was technically possible in those times, was used for
testing freshly minted coins, and became known as the Trial of the Pyx.
Touchstones were handy-sized pieces of fine-grained schist or opaque
quartz, commonly red, yellow or brown, which had from antiquity been
used for testing precious metals by drawing the metal object across the
stone and examining the colour-trace left by the metal on the stone's
smooth surface. Variations in colour corresponded with variations in
the purity of the metal or its alloy. The resulting colour of any tested
coin could be compared with that made by standard metals kept
specially for test purposes. Although touchstones therefore enabled
judgements to be made only subjectively and comparatively,
nevertheless for most ordinary circumstances they served their purpose
well. Certainly they readily exposed at least the grosser debasements
which might otherwise easily pass the normal scrutiny of the market-
place. As increasing use of gold coins became fashionable the need for
touchstones grew considerably since the profits from debasement or
adulteration, whether official or unofficial, were all the greater. In any
cases of dispute it was natural for the contestants to turn to the experts
- the goldsmiths - to decide the matter. In this way the Goldsmiths'
Company of the City of London became, as early as 1248, and remains
to this day, the official arbiter of the purity of British coinage. Before
better techniques were introduced the London Goldsmiths regularly
kept and issued twenty-four test gold pieces or 'touch-needles' for use in
conjunction with touchstones, one for every twenty-four of the
traditional gold carats, with similar test pieces for silver. They also were
responsible for issuing test-plates of gold and silver to the nine regional
hallmarking centres such as Birmingham, Edinburgh, Chester and
Exeter. A number of public trials based on such test pieces grew up
around all the regional mints; but the most formal, meticulous and
strictest of all the monetary tests were those of the London mint -
which by then had become by far the most important - known as the
'Trial of the Pyx'.
In this way a public jury of 'twelve discreet and lawful citizens of
London with twelve skilful Goldsmiths' were, from the mid-thirteenth
century onward, empowered to make a public testing of a sample of
coins freshly issued or issued within a previously agreed time limit, by
the Royal Mint. The earliest extant writ ordering such a public trial is
that by Edward I, in 1282, another indication of his determination to
maintain the quality of the currency. In 1982, to mark the 700th
IN MEDIEVAL EUROPEAN MONEY, 410-1485
147
anniversary of the writ of Edward I, the Trial of the Pyx was attended
by Queen Elizabeth II and the Chancellor of the Exchequer, Sir
Geoffrey Howe. The 'pyx' derives its name from the box within which
the coins were locked and so kept safe from being used or being
tampered with until the day of their public trial. Whereas the simple
touchstone method hardly damaged or marked the coin and was just
concerned with a general indication of the composition of the metal,
the trial by pyx was always far more thorough, investigating all aspects
of the coinage, using the most up-to-date techniques available for
testing the weight, design, diameter and purity of the coins, with a
sufficient sample usually being melted down, to see that they complied
with the strictest letter of the law. The pyx also indirectly encouraged
the use of the most economical and least wasteful methods of turning
precious metals into coinage, the allowable tolerances being
continuously improved through time. The pyx thus helped the
merchants to get the coins of the standards they liked, and the king to
get full value in coins in return for the precious metals sent to the mint.
The London Goldsmiths' Company and their jurymen were known to
take their duties very seriously and so were a powerful factor in
reinforcing the determination of most of the English kings during the
Middle Ages to resist the general European slide towards debasement.
Sound money was sound sense: that was the axiomatic and
unquestioned assumption.
The Treasury and the tally
Any change in the quality of the currency was literally brought home to
the royal treasury whenever taxes were collected, especially during the
normal regular twice-a-year collections brought by the sheriffs to
London. Because of this the sheriffs would have carried out their own
preliminary selections throughout the previous six months, weeding
out the more obviously inferior coins, fully conscious that a stricter
scrutiny would face them at the court of the Exchequer. There was
therefore a necessarily close connection between the minting of money
and collecting it back in taxes. Minting and taxing were two sides of the
same coin of royal prerogative, or, we would say, monetary and fiscal
policies were inextricably interconnected. Such relationships in the
Middle Ages were of course far more direct and therefore far more
obvious than is the case today. In the period up to 1300 the royal
treasury and the Royal Mint were literally together as part of the king's
household. When the mint was moved to the Tower in 1300 it was
because it needed larger premises and in any case it was still very close
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to the royal administrative centre. Our knowledge of these
interconnections between the receipt and expenditure of royal moneys
is known to us not only from the Dialogus which was written about
1176—9 to which reference has already been made, but also to the
official collection of fiscal records known as the Red and Black Books
of the Exchequer, compiled from the thirteenth century onward, and
the Pipe Rolls of the Exchequer which extend from 1155 to 1833. The
importance of this rich historical quarry is thus fairly summarized by
Professor Elton: 'The history of the people of England, high and low
though more the relatively high, is deposited in the materials arising
from the efforts of her kings to finance their governments' (Elton 1969,
53).
The Treasury, or Exchequer, as it was more commonly called, was the
first section of the royal household to be organized as a separate
department of state clearly distinguishable from, though inevitably still
very closely associated with, the management of the royal household.
As early as the middle of the twelfth century its increasing workload
caused it to become divided into two sections, one specializing in the
receipt, storage and expenditure of cash and other payments, and the
other into recording, registering and auditing the accounts. The first
section, the Exchequer of Receipt, was also known as the Lower
Exchequer, while the second section, the Exchequer of Account, was
called the Upper Exchequer. For ease in reckoning and 'checking' the
cash payments, the Exchequer tables, ten feet by five, were covered with
a chequered cloth, either black lined with white, or green with red-lined
squares, which custom gave its name not only to the institution but also
subsequently to the 'cheque' or, as still in America, the 'check'. The
Exchequer of Receipt made increasing use of an ancient form of
providing evidence of payment by issuing 'tallies', and developed this
system so much that the history of the Treasury is inseparately
connected with that of the tally. Anthony Steel did not exaggerate in
giving his expert opinion that 'English medieval finance was built upon
the tally' (Steel, 1954, xxix).
From time immemorial, scored or notched wooden sticks have been
used in many parts of the world for recording messages of various
kinds, particularly payments. Wood was normally very readily available
and therefore very cheap. Although easy to mark with the desired
message or numbers, it was durable, and with reasonable care it was not
easily damaged. Thus just as our word 'book' is probably derived from
the 'beech' tree, so the piece of wood customarily used as a receipt was
called a 'tally', from the Latin 'talea', meaning a stick or a slip of wood,
and still retaining its monetary significance in the Welsh 'talu', meaning
IN MEDIEVAL EUROPEAN MONEY, 410-1485
149
'to pay'. This derivation seems more probable than the alternatively
suggested derivation from the French 'tailler', to cut, which supposed
the method of scoring to explain its origin - though here again this
usage may have reinforced the acceptance of the term. In days before
paper became cheap enough for everyday use, when literacy was low
and numeracy limited, the use of special, simplified forms of wooden
records was universally popular. Consequently it was perfectly natural
for the Exchequer to adopt and adapt this well-known practice. Nowhere
in the world, however, did the use of the notched stick or 'tally' develop
to such an extent, or persist in official circles so long, as in Britain, even
after the arrival of modern banking methods and cheap paper had long
rendered them redundant (see Robert 1952 and below, p. 663).
At first the tally was used by the Exchequer in just the same way as in
private business affairs, that is simply as a receipt. Our detailed
knowledge of the ways in which the tallies were used again comes
mainly from the Dialogus de Scaccario, written by Richard Fitznigel,
whose family exercised a powerful influence over the king's business
throughout the twelfth century, beginning with Roger of Caen, who was
made bishop of Salisbury by Henry I in 1102, and became known as
'the principal architect of Anglo-Norman administration' - praise of
the highest order. His nephew Nigel became bishop of Ely in 1133, and
it was his son, Richard, who wrote the Dialogus, the first treatise on
any government department in England, based on some forty years'
experience as Treasurer of the Exchequer, from about 1156 or 1160 to
1198. For this long, effective and faithful service he was made bishop of
London in 1189, an office which he held concurrently with that of
Treasurer (Chrimes 1966, 50-65). From the example of this single
family, entrenched in the new civil service, we can see how Church, state
and finance were almost inseparably interconnected, a fact that also
helps to explain how the kings' business was usually carried through
with zeal and efficiency even during the sovereigns' considerable
periods of absence on crusades or other wars abroad.
From Fitznigel's detailed account we know that the tally was
commonly of hazel, about 8 or 9 in. long, although those representing
very large amounts of money would need to be correspondingly larger,
for the larger the sum, the larger the amount of wood removed in the
cutting process. According to the Dialogus, £1,000 (a very substantial
but not quite a rare amount) was represented by cutting a straight
indented notch the width of a man's hand (i.e. 4 in.) at the far end of the
tally; £100 was a curved notch as wide as a man's thumb (i.e. 1 in.). An
amount very commonly represented was the score or £20, which was
made by cutting a V-shape, the mouth of which would just take the little
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finger. The groove for £1 would just take a ripe barley-corn; that for one
shilling was just recognizably a narrow groove; a penny was simply a
straight saw-cut, a halfpenny merely a punched hole. Everybody, whether
or not he could read or write was aware of the standard values. When the
tax or other cash payment had been agreed the resulting tally was
carefully cut long-ways into two so that the two parts would match or
'tally'. The larger part, retaining the uncut handle or 'stock' was kept by
the creditor, while the smaller part, the 'foil' was kept by the debtor. From
this practice most probably came our description for government or
corporate 'stock' and for the 'counterfoil'.
The tendency throughout the Middle Ages towards commuting
payments in kind to cash payments had the unfortunate result - for the
Crown - of fixing such returns at the levels determined at the beginning
of that period. Consequently, even in normal peacetime periods, the
customary royal revenues were insufficient. Additional taxes, such as
'aids' and 'subsidies', grew from being special levies for helping to pay for
wars, ransoms and so on, to become part and parcel of the annual fiscal
requirements. By the middle of the thirteenth century the usual tax-
gathering system, according to Fitznigel, took the following fashion. Half
the taxes assessed for each region for the previous year were collected
during the first quarter by the sheriff, who carried the proceeds to be paid
in to the Exchequer of Receipt at Westminster at Eastertime. There the
careful counting, checking and tallying processes were then completed
and the audited results recorded in the Upper Exchequer. During the next
six months the rest of the taxes would be collected and, if necessary, new
assessments made. This adjusted half would then again be taken to
Westminster, the final proceedings being completed in the Upper
Exchequer, and the final tallies registered, at or around Michaelmas.
The true economic significance of the Exchequer tally soon grew to be
far more important, however, than being simply a straightforward record
of tax-collecting and receipt-giving. At a time when usury was strictly
forbidden and subject to the direst penalties the tally became not only
one of the main vehicles for circumventing such prohibition, but a
method of raising loans and extending credit, of acting as a wooden bill
of exchange, and a sort of dividend coupon for royal debt. It helped to
develop an embryo money market in London involving the discounting of
tallies, the negotiability of which led to an enlarged total of credit based
upon a growing foundation of Exchequer debt. In the last century or so
of the Middle Ages, when the demand for money was rapidly outgrowing
the European supply of silver and gold, the tally became used in ways
which effectively increased the money supply beyond the limits of
minting.
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151
The first stage in this process was the 'assignment', by which a debt
owed to the king, shown physically by the tally stock held in the
Exchequer, could be used by the king to pay someone else, by
transferring to this third person the tally stock. Thus the king's creditor
could then collect payment from the king's original debtor.
Alternatively this new creditor might decide to hold the tally to pay his
share of taxes required in a subsequent tax season. His decision of
which alternative to choose (or any similar variant) would depend on
the relative convenience and costs of the proceedings. What soon
became clear from as early as the twelfth century onward, was that 'the
exchequer of receipt was tending to become more and more of a
clearing-house for writs and tallies of assignment and less and less the
scene of cash transactions' (Steel 1954, xxx). The resulting economy in
the use of coinage and the relief of pressures on minting were again of
obvious importance.
A similar economy in the use of cash was made in the development of
the 'tallia dividenda' or, more simply, 'dividenda', which were initially
given to tradesmen who supplied goods to the royal court, the
'dividenda' being redeemable at the Exchequer, just as in the later, more
open system of dividend payments on government stock or bonds.
Similar net collections and net distributions of tallies were made by
sheriffs in aggregating the shire payments into larger amounts, often
with physically larger tallies, which again cut down on the amount of
purely cash transactions. A considerable increase in the flow of tallies,
and therefore a corresponding increase in credit, occurred when royalty
began habitually to issue tallies in anticipation of tax receipts, a system
commonly engrafted on to that of tallies of assignment. Owners of
exchequer tallies in, say, Bristol might have to travel to York or further
to collect their due payment - unless, that is, they could find someone
who, for a suitable discount on its nominal value, would purchase the
tally-stock from the holder. A similar process would result in order to
avoid having to wait until the Exchequer received its anticipated taxes.
In this way, by arbitrating between varying spatial and time preferences,
a system of discounting tallies arose, especially in London, operated in
a number of recorded instances by officials working in the Exchequer,
who knew the best way to work the system, and who could give the best
guarantees at the most reasonable discounts relative to the risks
involved. In this way too the sin of usury could safely be avoided.
There were other ways around usury by means of the tally. One such
method, particularly associated with cash payments into the Exchequer
in anticipation of taxes, was to record in the rolls and to issue as a tally
an amount greater, commonly by some 25 per cent, than the cash
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actually paid in. Although by the very nature of this procedure there
could be no written or other very obvious method to incriminate its
users, a number of expert historians have uncovered sufficient clues to
suggest that such practices were not uncommon. Since the originally
agreed date of redemption of such tallies was often delayed and
sometimes uncertain, another avenue opened up for the discounter of
these wooden bills of exchange. When the costs of discount were taken
into account the true rate of interest generally became much less than
the hidden allowance of 25 per cent or so initially granted.
However indispensable the tally may have been to the financial
system of the Middle Ages one could in strict logic hardly see the need
for it in later centuries. Here again, however, the logical and the
chronological, the expected and the actual, the apparently sensible and
the concretely historical, progress of events did not march hand in
hand. Far from dying out towards the end of the fifteenth century, the
tally went on growing from strength to strength, reaching its highest
importance in the generation which gave rise to the Bank of England at
the end of the seventeenth century and managing anachronistically to
persist right down to 1834 - developments which will be traced
accordingly in later chapters. It has already been shown how the
humble tally in the Middle Ages developed from being a simple receipt
to a fairly complex and sophisticated financial medium, providing
elasticity in the money supply unobtainable if the path of grossly
debasing the coinage were to be avoided, as was the case in England.
The tally also stimulated the hesitant, partially hidden rise in London
of an embryo money and capital market, where 'interest' was paid on
the basis of the repayment of fictitiously swollen loans. The increased
negotiability of tallies enabled rich individuals to raise larger loans for
the Crown and for other merchants. The tally, that medieval maid of all
monetary labours, possessed an engaging modesty that hid from legal
scrutiny a growing public involvement in usurious affairs. The struggle
to maintain the traditional Christian prohibition on usury began to
clash with the desires of a richer society to reward productive savings,
and with the even more urgent imperatives of the Crown to meet its
increasing expenses in peace and war, though these tensions did not
reach breaking point until much later. The tally was the main, though
not of course the only internal device for concealing usury. In external
trade Jews and foreign merchants (as we shall see below and in the next
chapter) were to provide not only lessons in avoiding usury but also,
more generally, the means by which British monetary practices were
very considerably influenced during the later Middle Ages. These early
developments were in principle not unlike those occurring today in the
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153
Arab oil-producing countries, where Muslim teaching with regard to
usury comes into conflict with the strong financial forces represented in
the enormous increases in the flow of petro-currencies, at a time when
the major banks and treasuries of the world are generally unconstrained
by the laws of usury.
The Crusades: financial and fiscal effects
The main external influences on English economic, monetary and fiscal
development in this period came not only from the usual causes — war
and trade - but from wars conducted at unprecedented distances and
also from the considerable growth of trade in the exotic new products
associated with those distant lands. Although the Crusades lasted,
intermittently, from 1095 to the mid-fifteenth century, it was during the
twelfth and thirteenth centuries that their main direct influences were
felt in England; with the so-called Hundred Years War with France,
from 1338 to 1453, subsequently taking the centre of the stage.
Currently fashionable arguments between historians as to whether the
Crusades should be widely or narrowly interpreted in terms of their
geographical extent are almost irrelevant from the point of view of their
direct effects on English financial history, except that the costs of
conducting wars such a long way from home as the eastern
Mediterranean were considerably greater than sending and equipping
an army of the same size for conflicts in western Europe (Riley-Smith
1982, 48-9). Payment for supplies, equipment, allies, ransoms and so
on, from time to time required vast resources of cash and the means of
safely and quickly transferring such money. These new needs gave rise
to financial intermediaries such as the Knights of the Temple and the
Hospitallers who began to perform important semi-banking functions
such as those which were already being developed to a fairly advanced
level in some of the Italian city-states and in the famous fairs of
medieval France. These customs were later carried by Italian
'Lombards', other foreign merchants, and by the Knights Templar and
Hospitallers, to London. Such activities were greatly extended in
volume and value by the Crusades. Ships which carried armies to the
eastern Mediterranean could and did offer cheap facilities for return
cargoes, and thus increased two-way trade across the Mediterranean.
Carpets, rugs, fruits, drugs, jewellery, glass, perfumes, finely tempered
steel, new kinds of machine, and above all new knowledge of
mathematics, navigation, architecture and medicine together
constituted a most valuable variety of visible and invisible imports from
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the east, and led to secular pressures towards recurring deficits in the
balance of trade of the Crusading countries.
The most immediately visible impact of the Crusades was, however,
in capital transfers and in the heavy forced loans and taxes raised to
finance them. All the same we must guard ourselves against the
temptation to assume that, because modern wars are highly
inflationary, then so also were those of the Middle Ages. This was far
from necessarily being so, since the heavily increased demand for
certain materials and services was roughly compensated by a
corresponding external drain of gold and silver to 'service' the
campaigns and to pay for the new luxuries from the East. The drain of
real resources in the form of the export of knights and their retainers
and camp followers together with their armour, horses, equipment, and
their transport by ship, was generally roughly matched by the drain of
cash and bullion, leaving the internal macro-equation between money
and goods roughly the same. Prices were far from being completely
stable of course, yet in view of the extent of movement of armies and
goods, a surprising degree of stability was nevertheless maintained by
the very nature of the physical basis of medieval money.
The importance of foreign exchange in the development of European
financial institutions can hardly be exaggerated particularly since most
of the earliest recognizable 'banks' of modern times arose, first in Italy
and France and then in the Low Countries, mainly out of their
involvement in foreign exchange. Such bankers had their agents in
almost all the important financial centres, e.g. Rome, Venice, Genoa
and Florence in Italy; at Troyes, Rouen, Lyons and Paris in France; at
Valladolid and Seville in Spain; at Bruges and Antwerp in the Low
Countries — as well as in London. Their financial involvement in
London - just like England's involvement in the Crusades - was,
however, at a lower level. It is significant that the early banks of modern
Europe developed first in Italy and France out of their massive involve-
ment in foreign exchange based largely on bills of exchange, whereas
when some centuries later indigenous banking developed in London it
arose primarily as a by-product of the activities of goldsmiths in
handling gold and silver in the form of both bullion and coins. As in
many other economic matters England relied mainly on foreigners to
conduct most of its early foreign exchange and other quasi-banking
activities, and leaned heavily on the specialized services provided by the
two main orders of international chivalry, the Knights Hospitallers and
the Knights of the Temple. The Order of the Knights of the Hospital of
St John of Jerusalem - to give its resoundingly full title - was first
formed in Jerusalem shortly after the city's conquest by the Christians
IN MEDIEVAL EUROPEAN MONEY, 410-1485
155
in 1099, to carry out its task of caring for the casualties of the Crusades.
Although the establishment of hospitals and the provision of medical
care has remained of importance to the order right up to the present (in
the form of the well-known St John Ambulance brigades) its
commercial, military and financial activities, sometimes in conjunction
with, but more often in competition with, the rival Templars, grew to
overshadow its more charitable functions. The Order of the Knights of
the Temple at Jerusalem — the Templars — was formed in Jerusalem in
1120 and grew in similar fashion to become a formidable economic and
political force around the Mediterranean shores and in western Europe.
These two orders of knights had their own ships, kept their own
private armies, depots and storehouses, and occupied strong-points and
castles at a number of strategically placed ports and inland towns, from
Spain to Syria and from England to Egypt. They could therefore easily
arrange the safe custody and delivery of valuable goods, specie and
coins, and often save the necessity of moving such specie and coins by
bilateral and sometimes trilateral offsetting transfers. They also
themselves owned considerable financial resources which they increased
as a result of accepting vast deposits from kings and merchants, which
they were then able to lend out to creditworthy borrowers, the interest
element in such dealings normally being hidden by the nature of the
transactions either in foreign exchange or as bills of exchange or,
frequently, as both. Among a large number of princely gifts made to the
two orders were the vast estates bequeathed by Alfonso I, king of
Aragon, and the less valuable but still impressive estates granted to
them in England by Stephen. They were even granted powers to mint
their own coins, as for instance did the Hospitallers for many years
from their bastion at Rhodes. They therefore were able to carry out the
whole range of merchant banking activities relevant to the increasing
demands of commerce and politics in the thirteenth and fourteenth
centuries. Their long-standing and manifold contacts with the Muslim
world in war and peace enabled them to act as a bridge by which the
learning of the East enlightened the economic and social life of the
West. It can hardly be a matter of mere coincidence that the first two
fulling mills (water mills for 'fulling' wool to remove its excess oil) were
both owned by and built on estates belonging to the Templars - in 1185
at Newsham in Yorkshire and at Barton in the Cotswolds, the latter
known to have been actually built by the Templars themselves. The
windmill, probably originating in Persia, had already spread to China
and over much of the Middle East by the time of the Crusades and
gradually spread its wings in Europe from this time onward. The
crusading orders therefore seem to have played their part in bringing
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about what Professor Carus-Wilson has called 'an industrial revolution
of the thirteenth century . . . due to scientific discoveries and changes in
technique' (Carus-Wilson 1954, 41). 'Primitivists' might justifiably
object to this premature use of the term 'industrial revolution', but they
cannot deny the commercial and financial revolutions that
accompanied and facilitated such industrial innovations. (For an
authoritative modern survey of 'The Place of Money in the Commercial
Revolution of the Thirteenth Century' see Spufford, 1988, chapter 11,
240-66).
Although the Crusades were not responsible for the origins of the
bourgeoning financial centres of western Europe, they can at the very
least be credited with greatly encouraging their growth by adding to the
variety and volume of goods traded, and also in assisting the
advancement of their financial techniques, especially in their
widespread use of the modern type of bill of exchange. Our knowledge
of the origins of the modern bill of exchange is rather vague, and
despite some allusions to their use by the Arabs in the eighth century
and by the Jews in the tenth century, there appears to be no concrete
evidence of their use before the period of the Crusades. The growth in
the use of bills of exchange was therefore coincident with, but never
exclusively confined to, the rapid expansion in the transfers of the large
amounts of capital required to finance the Crusades. Although a very
considerable number of merchant bankers were involved in such
transfers - at a time when most merchants were forced to act partly as
bankers, and most bankers were similarly involved in wholesale trading
- the two main intermediaries, so far as their direct involvement with
the Crusades was concerned, were the Knights Templar and the
Hospitallers.
According to Einzig, the first known foreign exchange contract was
issued in Genoa in 1156 to enable two brothers who had borrowed 115
Genoese pounds to reimburse the bank agents in Constantinople, to
which their business was taking them, the sum of 460 bezants one
month after their arrival. Such examples grew fairly rapidly in the
following century, especially when the profits from time differences in
bills involving foreign exchange were seen as not infringing canon laws
against usury. The Church itself used the same system. In 1317 'the
Papal Chamber concluded with the banking houses Bardi and Peruzzi a
contract covering a period of twelve months, during which the Papal
Nuncio in England was to pay over to their London branches the
proceeds of the Papal collections for remittance to Avignon', such
contracts being renewed year after year (Einzig 1970, 68). The examples
given refer to real transfers from one country to another; but partly to
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157
escape from the penalties of usury and partly to tap credit which would
otherwise not have been made available, large amounts of 'fictitious'
bills were issued which either were simply domestic deals masquerading
as foreign or simply dealing in credit without real goods or services
being involved. In this way again the constraints of a limited supply of
gold and silver money were being overcome by the extension of paper
credit, just as in the more backward use of wooden tallies for such
purposes in England.
Although the financial results of the Crusades were far-reaching it
was their fiscal effects in the form of urgent, heavy and repeated calls
for cash through new aids, subsidies, tithes and other taxes, which
appeared of most obvious concern to contemporaries in England.
When the generous but weak Stephen was succeeded by the strong, rich
but parsimonious Henry II (1154-89), the scene was set for an epic
struggle between Henry in England, the Templars and Hospitallers who
acted as his bankers in Jerusalem, and the Crusading armies in the Holy
Land, who were fed on promises but denied access to Henry's funds.
Henry first raised a special tax to support the Crusades in 1166,
followed by such lavish payments to the Templars and Hospitallers
from 1172 onward that he came to be considered - by the critical
Gerald of Wales (among others) - as the 'chief support of the Holy
Land'. In 1185 Henry levied a new 'crusading tax' at sixpence in the
pound on all movable property and 1 per cent on all incomes whether
from land or any other source, a heavy burden repeated in the following
two years. In 1187 Henry's eastern account, therefore, securely
maintained in the strongholds of the Templars and Hospitallers where
it was as safe as if it were still held in the London Exchequer, amounted
to the huge sum of 30,000 marks or approximately 20,000 pounds of
silver. As Dr Mayer has shown, 'all the evidence points to Henry
accumulating money in the East without permitting anyone to spend
it', at least until after the disastrous battle of Hattin in 1187 (Mayer
1982, 724). Thus the explanation for the fall of much of the Holy Land
to Saladin is not due to the 'damsel in distress' theory, namely the
traditional story of the Crusaders' armies being diverted to aid the
'Lady of Tiberias', wife of Raymond III, Count of Tripoli, but rather
the miserly restrictions placed by Henry on the use of his vast hoard of
money, in an eventually vain attempt to have his cake and to eat it.
Money, not chivalry, lay behind the fall of Jerusalem; money in apparent
abundance but in reality frozen in the bank vaults of the Templars and
Hospitallers.
The shock of the fall of Jerusalem stirred Henry to unfreeze his
eastern deposits, to raise yet more taxes, and finally at long last to 'take
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the cross' himself (i.e. to fight personally in the Crusades). The 'Saladin
Tithe' of 1188 extended the new source of taxation inaugurated in 1185,
namely the taxation of personal property, and also speeded up the
assessment system by demanding that each person should make his own
personal assessment and that such assessments should be verifiable by
persons in the locality who could vouch for their veracity. These examples
of local accountability boomeranged against the royal prerogative in later
years from its tendency to strengthen the customary right for greater
public discussion of taxation by the king's council, a forerunner of
Parliament's scrutiny of royal taxation. The principle of 'no new kinds of
taxation without some more explicit form of representation' thus has a
long, long history, stretching back well into the Middle Ages.
The outcry against the heavy burden of the Saladin tithe was far from
being the end of the matter, for when the more adventurous Richard I
(1189—99) succeeded his father, England's money problems multiplied.
Richard's policy (reminiscent of that of the Thatcher government's
'privatization' of publicly-owned assets in the 1980s) was to put up as
much as possible for sale in order quickly to supplement the taxes,
liberally granting patents and charters to persons, guilds and towns, in
return for cash with which to buy allies, ships, armies and munitions. He
also raised ten thousand marks (or about £6,666) from the king of the
Scots by releasing him from the vassalage he had previously been forced
to promise. Thus armed, Richard embarked on the Third Crusade in
1190. His quarrels with Leopold, Duke of Austria, led on his return to his
capture in Vienna, and his sale to Emperor Henry VI, who imprisoned
Richard at a secret location. The delightful legend of his discovery - at
Durrenstein Castle - when Blondel, his personal troubadour, played
Richard's favourite tune, and so eventually received his royal master's
response in song - has subsequently reinforced the many bright tales of
medieval chivalry; but at the time it turned out to be a most expensive
adventure.
The piper's tune cost England a pretty penny. A colossal ransom of
150,000 marks, i.e. £100,000 or twenty-four million pennies, was
demanded, a sum which far exceeded the whole of the average revenue of
the kingdom. Nevertheless, a high proportion of the ransom was quickly
raised and paid over before Richard's release. An aid of £1 on each
knight's fee, together with a general 'income tax' of 25 per cent on rents
and property, supplemented once more by further sales of royal offices
and privileges and by generous gifts, sufficed to raise the required
amount. Among the most generous of the gifts were the £2,000 given by
the king of the Scots, and the proceeds from the whole of the year's wool
clip by the Cistercian monks from their sheep-rich lands.
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159
Little wonder that the eventual reaction to such heavy and repeated
burdens showed itself in a number of constitutional developments
around this time. Article XII among the sixty-three clauses of Magna
Carta, which the barons forced John to sign on 15 June 1215, stated that
'no scutage or aid, except for ransom, for the knighting of the king's
eldest son, or the marriage of his eldest daughter, should be raised
without the consent of his Barons assembled in Great Council'. Despite
frequent royal backsliding, Henry III (1216-72) was similarly forced to
toe the line when his crusading adventures led him into debts that could
not be easily redeemed through the revenues from ordinarily acceptable
taxation. Immediately on taking the cross in 1250 Henry attempted on
behalf of the pope to wrest Sicily from the control of the
Hohenstaufens, but soon quarrelled with his sponsor when he
attempted to crown his younger son Edmund king of Sicily. When
Henry was threatened with excommunication and found himself
virtually bankrupt at the same time, he appealed to his barons for
financial assistance. The barons, however, agreed to grant an aid only
upon certain conditions. They demanded the reforms suggested by a
royal commission composed of twelve royal appointees and twelve
representatives chosen by the barons themselves. Although the report of
this commission to the King's Council or Parliament at Oxford in 1258
— the famous Provisions of Oxford — was annulled in 1266, the
importance of the event, as with Magna Carta, derives from the
repeated use of royal indebtedness to secure redress from a number of
royal impositions. These baronial protests were no mere empty
gestures, but, according to Professor Mitchell, an authority on medieval
taxation, represented 'a revolutionary change. The barons on the great
council refused to grant any further gracious aids that took the form of
a tax on personal property', so that 'from 1237 to 1269 no such levy was
taken' (Mitchell 1951, 102).
Increasing indebtedness forced the pace of commutation, increased
the role of money and revealed how closely interconnected were the
royal prerogatives of minting money and raising taxes. The king's
power to profit from debasing the coinage was certainly held in check
by the Council who also occasionally even managed to modify the form
of taxation and to wrest some constitutional advantage in return. The
fact that such (for those days) enormous sums of money could be raised
so quickly gives concrete evidence of the greatly increased wealth and
taxable capacity of the growing population during the commercial
revolution of the long thirteenth century - to be followed by what
appeared in glaring contrast to be the inspissated doom and gloom of
the fourteenth.
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The Black Death and the Hundred Years War
Although famine and pestilence had always afflicted previous ages, the
virulence and persistence of the plagues of the fourteenth century stand
out as the most malign in the history of mankind, and the Black Death
(1348-50) as the first and worst of the whole of the recurring series, the
most recent of which was that of 1665-6. The flea- and rat-borne
bubonic plague had spread quickly from central Asia, arriving in Sicily
in 1347 via a ship from the port of Kaffa, a Genoese colony in the
Crimea, which had become infected when a besieging Turkestan army
catapulted into the colony bodies which had just died of the plague.
The plague reached Melcombe Regis near Weymouth in Dorset from
Calais in August 1348, and by 1350 had spread throughout the British
Isles to the north of Scotland. Few regions or classes escaped, the plague
being no respecter of persons or provinces. Thus Joan, daughter of
Edward III died at Bordeaux on the way to her anticipated wedding;
and while there is some evidence of local variations, there was no
pattern of marked differences between town and country. Although the
numbers dying in each of the later plagues were less than in the first
case of 1348-50, their influence in the fourteenth century on prolonging
and intensifying the fall in population was probably even greater, since
they affected the younger age groups with special severity and so
contributed disproportionately to the fall in the birth rate. Plagues of
some sort or other (and not simply bubonic plagues) became endemic
with hardly a year passing without renewed outbreaks in some region
or other and with really major plagues recorded in 1361, 1369, 1375,
and 1379 followed by plagues of national proportions in 1400, 1413,
1434, 1439 and 1464. Plagues prevailed in sixty years in England
between 1348 and 1593, and returned in a final major epidemic in 1665.
The cumulative result was that the population of England, which had
risen to a peak of between four and five million in 1300, had fallen by 50
per cent or so by 1425, back to the kind of level obtaining in 1175. All
such figures are approximate, for despite the two bench-mark statistics
supplied by the Domesday survey of 1086 which mentioned, as we have
noted previously, some 283,242 persons, and the Poll Tax returns of
1377, which gave the total number of those actually paying the tax as
1,386,196, the margins of error remain wide. There is some evidence
that the population was already beginning to decline before the arrival
of the Black Death in 1348 — a feature which would have been of minor
importance had it not given rise to contention among historians who
became tired of what they assumed to be a simplistic tendency to
ascribe to the Black Death trends which to the careful historian were
IN MEDIEVAL EUROPEAN MONEY, 410-1485
161
clearly visible before that calamity. Whereas many of these arguments
are irrelevant to our main theme, some of them have a direct bearing on
the development of money and prices in the fourteenth and fifteenth
centuries.
The arguments among the experts about the influence of the plagues
on money and prices are still very much alive. The overriding,
unmistakable, traditional view needs to be emphasized that, whether or
not the economic changes ascribed to the Black Death originated
earlier, there can be little doubt as to the devastating results of the
plagues in swamping all previous trends, obliterating some and
enormously accelerating others. Furthermore, since the direct effects of
the plagues were so appallingly all-embracing, it is bound to be
somewhat distorting to narrow the focus, as we must, simply to deal
with its economic and financial effects. There is much merit in the
following conclusion given by Professor W. C. Robinson in an
interesting discussion of this subject: 'The present trend to
"revisionism" notwithstanding, the Black Death, wars, and other
disruptions which wracked Europe for a century are still the best
explanation of the sudden collapse of economic growth and population
which seem to have occurred in the late Middle Ages . . .' and he
reiterates the traditional, classical view that 'changes in the money
supply were probably the most important single factor in the price
changes which occurred in medieval and early modern times' (W. C.
Robinson 1959, 76: see also Postan 1972; Gregg 1976; E. King 1979).
The nature of medieval markets, a severe shortage of labour, a drastic
fall in output, an initially unchanged money stock and a fall in the
velocity of money: these are the five factors which, working in variously
weighted combinations, help to explain the influence of the plagues on
the course of financial development in the fourteenth and fifteenth
centuries. Medieval markets exhibited a curious and changing mixture
of long-term price stability in some respects, together with extreme
volatility of prices in other respects. Where feudal ties remained strong,
customary monetary payments as well as payments in kind tended to
remain stable, though obviously the market value of that part of the
harvest received by knight, lord or bishop from his serfs, villeins or
peasants would fluctuate considerably whether or not they were
supplied in kind. Agriculture was still by far the dominant sector, and
with levels of productivity low (except in the special case of wool) the
supply available for the market was generally simply the volatile,
weather-controlled surplus left over from meeting the needs of the local
community. There is considerable evidence of relative 'overpopulation'
up to the early fourteenth century, so that famine prices for foodstuffs
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recurred from time to time. Medieval markets were usually 'thin', that
is, the volume of goods available at a particular price was very limited
and so were stocks compared with the situation in more modern times.
Transport was slow and transport costs, particularly for the bulky
goods which predominated in an agricultural society, were heavy. Local
shortages could not be readily or inexpensively relieved and neither
could the impact of local surpluses be readily siphoned away to other
areas so as to maintain price levels locally. Furthermore, on the physical
production side, agricultural output could not be easily managed or
brought easily into rapid relationship with changing demand.
Unavoidable waste and high inelasticities of supply made for widely
fluctuating prices despite all the inbuilt attempts of feudalism to impose
some sort of order and stability over the power of the markets.
When upon this normal instability was imposed the key shortage of
manpower occasioned by the plagues, then the way was opened for a
long and bitter struggle for freer labour markets, marked not only by an
inevitable upward trend in wages but by increased expectations of
liberty and of the removal of the irksome personal bonds imposed by
the feudal system. The 'land hunger' of the thirteenth century, even if it
had been growing less serious in the first part of the fourteenth century,
was now suddenly replaced by an unmanageable surplus of land, as
around one-third of the labour force died in 1348-9. Far higher death
rates occurred in certain regions so that the resulting disruption to
customary work programmes resulted in a massive fall in total output.
Most prices quickly broke through their customary restraints with
the price of the scarcest factor, labour, naturally tending to rise fastest.
The poor always have a high income elasticity of demand for food, and
consequently the rise in wages helped to maintain food prices at a
higher level than those for hand-crafted or literally 'manufactured'
goods. This explains why a relative land surplus, coinciding with
unprecedented high wages in a labour-intensive agricultural society,
together with a drastic fall in total output led to reduced rents and
profits for the landowners despite the marked tendency to forsake
marginal land. Costs rose faster than profits; and this, quite apart from
the appalling effects of the Black Death itself, reduced business and
farming incentives and demoralized the nascent entrepreneurial spirit
even in those sections of the economy - such as wool, cloth, wines,
charcoal and metals — which were already sensitive to the normal
market forces of demand and supply in medieval times. Although of
course no nationwide figures of wages actually being paid are available,
and whereas regional differences are known to have been considerable,
a general picture of the rise in wages may be seen from the following
IN MEDIEVAL EUROPEAN MONEY, 410-1485
163
examples given by Professor Hatcher (1977, 49): thus the daily wage
rate for a labourer was about lVid. in 1301, was still only VAd. in 1331,
then rose much faster to about 3V*d. in 1361. A carpenter earned
around 23/«/. a day in 1301, nearly Ad. in 1351 and about AlAd. in 1361.
Although by modern inflationary standards such rises may appear
piffling, they seemed devastating to contemporary employers, and a
violation of the accepted morality of the 'just' price.
The change from cheap to dear labour was strongly resisted by the
landlords and by Edward III, who quickly issued a restrictive Ordinance
in 1349, followed by a fuller and more formal Statute of Labourers from
Parliament when it met, for the first time after the Black Death, in 1351.
It had been called, according to Edward's own account, 'because the
peace was not well kept, because servants and labourers would not
work as they should, and because treasure was carried out of the
Kingdom and the realm impoverished and made destitute of money'
(Feavearyear 1963, 19). We shall therefore first examine Parliament's
resultant policy on law and order, employment and wages, and then
look at the measures adopted to cope with the damaging export of coin
and bullion. The king saw clearly that these were but two sides of the
same problem - of what we would call internal cost-push inflation and
external exchange rates. The Statute of Labourers stipulated the
maximum rates of pay, at pre-plague levels, which were to apply to all
the main occupations; it also stated that all able-bodied men under
sixty should be forced to work; and it severely restricted not only the
mobility of labour between jobs, but actual freedom of movement
between villages. These provisions were to apply to all workers and not
just villeins. Despite the fact that such severe restrictions could not be
uniformly enforced, the repeated attempts to do so unified the
economic, political, religious and social grievances and led, eventually,
to the Great Rebellion of 1381.
The law might hinder, but it could not prevent, the profound changes
in the value of money from benefiting the labouring classes. Because
wage rates rose much faster than prices, and because output per head
also actually rose despite the decline in total national output, the real
wages of the working classes tended to rise, with few reverses, for a
century and a half throughout most of the fourteenth and fifteenth
centuries. Hence the paradox of patches of real progress amid the
general secular depression of these centuries; a paradox that helps us to
see the compatibility of the apparently totally contradictory views such
as 'Postan's tale of recession, arrested economic development and
declining national income' and 'Bridbury's proclamation of an
astonishing record of resurgent vitality and enterprise' (Hatcher 1977,
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36). This patchy economic progress was accompanied by rising
expectations among the working classes and a growing resentment
against the established authorities of Church and state. What finally
turned this smouldering resentment into open and widespread rebellion
was the imposition of new taxes to meet the increasingly irksome costs
of the Hundred Years War, a series of bloody conflicts that between
1338 and 1453 helped to destroy the old feudal system on both sides of
the Channel.
If we use the generally familiar 'Fisher identity' of MV=PT to help to
interpret the changes in the value of money in the century or so
following the Black Death we can readily see that the enormous
reduction in total transactions (T) combined with an initially
unchanged quantity of money (M) would be bound to lead to a
substantial increase in prices (P) which for the reasons already given, led
especially to increased wages (I. Fisher 1911). However, the substantial
decline in the velocity of circulation of money (V) acted to moderate the
rise in prices. An even stronger and longer-lasting influence in
preventing the huge surplus of money from having its full price-raising
effect on the reduced quantities of goods being produced by the
repeatedly decimated population was the enormous drain of money
from England to the Continent chiefly because of the high cost of wars
but also because of other monetary and trade factors. Among the most
important of these other drains - or 'leakages' as we now term these
reductions in consumer spending power - were the heavy taxes imposed
by governments which diverted incomes from spending on internal
consumption mainly to expenditures abroad to support the army. A
similar leakage occurred through the importation of luxury goods,
which partly explains the antipathy shown by John Wycliffe and his
'Lollards' against the debilitating and sinful influence of rich foreigners,
who acted prominently as import agents in London, and who, as in the
biblical parable of the tares, sowed their moral weeds or 'tares' on good
English soil (Latin 'lolia' = tares). An external leakage exerting a direct
influence on the money supply was the continued selection, or 'culling',
of English silver and the new gold coins for export. Despite some
replacement by debased imitations from abroad, the quality of these
was such that they were not so readily accepted in payment, and
therefore failed to do much to offset the persistent foreign drain.
The unofficial drain of gold and silver bullion and coinage stirred the
wrath of the administration and caused it in 1351 to strengthen the
previous prohibitions on export (such as that issued in 1299 and known
as the Statute of Stepney), but to no great practical effect. The
unofficial drain was supplemented by the government's decision to set
IN MEDIEVAL EUROPEAN MONEY, 410-1485
165
up an English mint to produce English coin in Calais, which remained
in existence from 1347 to 1440. This extension of circulation made it all
the easier for overseas imitators to pass their inferior 'esterlin'
currencies. The fact that foreign debasement proceeded at a faster pace
than that of the English currency tended to produce repeated strains on
the balance of trade, for the financial pressures of the strong pound
were bound to make it that much harder to export and easier to import
goods which again contributed to the export leakage of coin and
bullion. To try to eliminate, or at least to reduce, the temptation offered
to illegal exporters of coin, the weight of the penny, which had
remained almost unchanged for 200 years, was slightly reduced by
Edward III in 1344 and reduced more substantially by him in 1351, the
total reduction of the silver content of the coinage over those seven
years being 19 per cent. Parliament was not happy, and by the Statute of
Purveyors of 1352 expressed the hope that the king would no more
tamper with the coinage than with the standards of weights and
measures.
Two further aspects which contributed to a reduction of surplus
money relative to the gross fall in the national product were, first, that
during times of war and plague hoarding increased, so removing coin
from circulation, a process which applied also to much of the foreign
coin brought back by the victorious army. Secondly, coins wore out and
the mint was inactive for long periods, so that the previous replacement
rate was reduced. Thus the recoinage associated with the new policy of
devaluation stimulated an average annual rate of production of
£100,000 of gold coin and £50,000 of silver coin in the five years from
1351 to 1355 inclusive, whereas the average annual rates fell to only £9,500
of gold coins and £900 of silver coins in the whole of the thirty-nine
years from 1373 to 1411 inclusive. Thus instead of the same amount of
money chasing half as many goods and practically half as many
workers, the reduction of the excess money supply by these various
means considerably moderated the inflationary impact of the plagues.
So long as the war with France yielded its harvest of victories and
ransoms the burdens did not seem insupportable. The increased
revenues required for war were obtained at first by a combination of old
taxes and customs duties raised to new heights, supplemented by a
relatively small amount of borrowing. In the Middle Ages wool was by
far the principal export and the main source of royal revenue. The
export of 'England's golden fleece', the 'goddess of merchants', was
controlled by the Society of Staplers, the oldest company of merchants
in British overseas trade. They made Calais for two centuries their
'staple' port from the time of its capture by Edward in 1347 until its loss
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by broken-hearted Mary I in 1558. Calais therefore was doubly
important to the English monarch — as his mint and as his most
abundant source of trade-based revenue. The customary duty on wool
was raised from 6s. 8d. to an average of 405. a sack in 1338, with foreign
merchants having to pay a surcharge above that paid by English
merchants. In the course of the next five years England's golden fleece
lived up to its name by supplying more than £1 million to the royal
Exchequer. Edward also profited directly by purchasing the greater part
of the wool crop himself at low prices and selling it through Calais at
much higher prices. Thus monetary, fiscal and trade-protection policies
were neatly integrated. On balance the Calais mint was not therefore an
abberation but a logical, convenient and long-lasting result of
convergent military, monetary and taxation pressures. The high tax on
raw wool exports, of around 33 per cent in value, combined with a low
tax on cloth of only about 2 per cent in value, helped to stimulate cloth
manufacture in England, but led to a substantial decline in raw wool
exports and so, as an unfortunate by-product, resulted in a considerable
fall in royal revenues from this source. This in turn contributed to the
growing urgency to find other sources of taxation in the period 1377 to
1381.
The net military balance of ransom, loot, bounty and plunder tended
to favour the English, particularly during the early stages of the war, as
shown by the victories of Sluys in 1340, Crecy in 1346 and Poitiers in
1356, which latter yielded the highest prize of all when King John II of
France was captured. A vast ransom of three million gold crowns
(£500,000) was demanded, and though in the end only something a
little less than a half of this was in fact paid, this still represented a
massive amount, some four times larger, we may note, than the total of
all the poll taxes which stirred up such turmoil a generation later.3 Part
of the proceeds was used to rebuild the royal apartments of Windsor
Castle, a permanent record of conspicuous expenditure typically
engendered by such windfall riches. The 3d. a day paid to infantrymen,
and the 6d. paid to archers with mounts, were poor incentives
compared with the troops' customary one-third share of ransom money
or booty (the other two-thirds shared equally between their captain and
their king). When the tide of the long war turned against England, the
net costs also grew far heavier, and were resented all the more since it
was just at this time that the king's advisers decided that new forms of
direct taxes had to be levied. New taxes are always detested, especially
poll taxes, whether it be the 1380s or the 1980s.
3 This was the origin of the 'franc', a coinage paid for the King's freedom.
IN MEDIEVAL EUROPEAN MONEY, 410-1485
167
Poll taxes and the Peasants' Revolt
There is no doubt that the three poll taxes of 1377, 1379 and 1381 acted
as the trigger for the Peasants' Revolt of 1381, even though it was the
long build-up of social and economic grievances 'between the
landowner and the peasant, which had started with the Black Death
and the Statute of Labourers' which formed the most important group
of causes (Oman 1981, 5). The penalties of the Statute were repeatedly
re-enacted and increased in severity while the yield of indirect taxes fell
with the decline in national output.
The burden of taxes was soon to be grossly inequitable because,
whereas the percentage fall in population varied from district to
district, no reassessment of the customary burdens of tenths and
fifteenths based on the new population was carried out. As time went
on these distortions grew progressively worse, although the problem
did not become pressing until the decade following 1371, when the
frequency, amount and regressiveness of taxation were sharply
increased. These new burdens, occasioned by the disastrous course of
the war, were all the more resented because they stood in contrast to a
preceding period of some twelve years (1359-71) during which no direct
taxes were levied, 'this being one of the longest respites from taxation
enjoyed in the fourteenth century' (Fryde 1981, xii).
The levying of flat-rate taxes on all 'adults' was felt by the king's tax
commissioners to be fairer than trying to raise the same amount on the
basis of out-of-date local assessments from shires and towns.
Furthermore, many of the formerly poor labourers had now become
relatively much better off and could afford to be taxed directly. They
had, in the words of Piers Plowman, 'waxed fat and kicking', and it was
widely felt that they should in all equity contribute their share.
Contemporaries were quite aware of the regressive nature of poll taxes,
but when all the arguments are taken into account there seemed in
principle to be a perfectly good case for having recourse to such taxes.
These poll taxes were therefore levied in addition to the ordinary tenths
and fifteenths and certain other taxes on movables which were also
being demanded concurrently. It was however the novelty of the poll
taxes, and especially the greatly increased burden of the poll tax of
1381, which finally led to open rebellion. The first poll tax in 1377 was
Ad. for all 'adults', from fourteen years old. The collectors recorded
1,355,201 such taxpayers, the total revenue being assessed at £22,586.
135. Ad. Additionally, a miscellaneous body of 30,995 persons were
recorded in the tax returns giving a total (underestimated) taxable
'adult' population of 1,386,196. This gives us the figure mentioned
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above as the base from which estimates of the total population of
England in 1377 have been derived, such estimates being very
considerably increased, by as much as a million or more, as a result of
modern research (e.g. see Postan 1966).
The second poll tax of 1379, while also being based on a notional
4c/., was assessed at a slightly lower total of £19,304, because it was in
fact carefully graduated according to social status and was therefore
probably the most equitable of all the direct taxes of the fourteenth
century. In harsh contrast, the third poll tax, that of 1381, was far more
severe. It was assessed at £44,843, or double that of each of the previous
taxes. Every lay person above the age of fifteen had to pay three groats
or Is., triple the basic rate of the previous polls. Clerical persons were
separately assessed. This heavy tax was felt even by the local assessors
to be so unreasonable that they connived at an unprecedented degree of
evasion by the poorest, upon whom the burden was clearly
insupportable. In the two previous polls the heaviest tax paid by the
poorest was Ad. In 1381 they were expected to pay the whole shilling
with very few exceptions. The degree of evasion is shown by the fact
that the recorded taxable population, though free of plague, fell by a
fifth as a national average, with some regions registering an apparent
fall of more than a half. When the commissioners of the tax attempted
to punish the tax dodgers, open rebellion broke out in town and
countryside involving over half the kingdom. Despite the promises of
constitutional amendments, given by the young King Richard II
(1377-99) to the rebellious hordes in London, the revolt was eventually
suppressed, leaving at least a warning and a series of unanswered
questions that still vex the experts to this day.
The revolt had been brought about by a whole complex of causes —
social, political, religious and economic as well as fiscal. But the
attempt to restrict, depress and overtax townsmen and agricultural
workers who had for more than a generation been experiencing a rise in
their real standard of living was a vital catalyst in this whole confused
complex of causes. A key factor was the king's need to raise more taxes
from a falling population which was individually growing somewhat
richer but which in the aggregate was becoming markedly poorer. Wars,
plagues and poll taxes proved to be a most inflammatory mixture. (The
Thatcherite administration, 600 years later, had to relearn the dangers
of trying to poll tax the populace.) Fleas and taxes, not just silver and
gold, had become major determinants of the real value of money.
IN MEDIEVAL EUROPEAN MONEY, 410-1485
169
Money and credit at the end of the Middle Ages
During the Middle Ages as whole, however coinage dominated
European monetary development. In England, a country which had
uniquely reverted to barter in the fifth century, a new indigenous
coinage based first on gold and then more firmly on the silver penny
gradually emerged during the seventh century, and thereafter that little
coin dominated England's monetary development for over 500 years
until it became marginally supplemented by gold in the fourteenth
century. Subsequently an uneasy bimetallic marriage was to last until
the beginning of the nineteenth century. Medieval money was above all
monarchical money, and monetary policy was among the most closely
guarded personal prerogatives of the king, though the Great Council
and Parliament were not without influence. The connection with fiscal
policy, therefore, was direct and clear, and it was at first mainly in
connection with the king's need to tax and borrow that credit
instruments of a quasi-monetary character also developed. The bill of
exchange was a foreign innovation which spread to England in
connection with the trade in wool and wine and the collection and
distribution of papal dues. Although the wooden tally had developed
universally as a receipt, nowhere else did it reach the heights it achieved
in England as a quasi-monetary instrument. Despite the considerable
development of credit, its monetary significance still remained
secondary to coins in England until after the end of the Middle Ages, a
feature which in terms of its scale helps to distinguish modern from
medieval times.
There were three types of coinage recycling prevalent in Europe
during medieval times, and although evidence of all three is to be seen
in England, only two of these types were resorted to extensively on the
English side of the Channel. The three types, in rough chronological
order, may be termed, first, revisionist or replacement; second,
restoration or repair; and third, debasement or devaluation with or
without adulteration.
Because of the high convenience of royally authenticated coinage as a
means of payment, and with hardly any other of the general means of
payment available in the Middle Ages being anything like as convenient,
coins commonly carried a substantial premium over the value of their
metallic content, more than high enough to cover the costs of minting.
Kings could turn this premium into personal profit; hence the
apparently puzzling feature of the wholesale regular recall of coinage
which was described earlier, first at six -yearly, then at three-yearly
intervals, and eventually about every two years or so. In order to make a
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thorough job of this short recycling process it was essential that all
existing coins should be brought in so as to maximize the profit and, in
order to prevent competition from earlier issues, the new issues had to
be made clearly distinguishable by the authorities yet readily acceptable
by the general public. These regular, complete changes in the whole
currency long before wear and tear set in, have been dubbed 'revisionist'
by numismatists, though 'replacement' might give a better indication of
the system.
The regular wholesale recall and reissue of coinage was of course a
wasteful and costly process which could moreover only be carried out
without too much trade-crippling delay when every borough had its
mint and when the total amount of money in circulation was small
enough to be manageable. The process of centralizing minting in the
eleventh and twelfth centuries in London, as opposed to operating the
seventy-five or so mints of the 'revisionist' period, coincided with the
rise in population, the growth of trade and an expansion of the money
supply which together made the continuation of the old 'revisionist'
cycle far less viable. Better methods of raising revenue rendered
revisionism redundant. The 'revisionist' cycle therefore gave way to the
'restoration' cycle of a much less regular type since it depended on the
supplies and prices of bullion available to the king on the one hand and
the normal processes of wear and tear on the other hand. It 'topped up'
the existing money supply rather than completely replacing it, and so it
was more in the nature of a piecemeal repair job than a thorough
renovation. Whereas under 'revisionist' policies complete recoinage
took place only three or four times a decade, under 'restoration'
policies such complete recoinages took place only three or four times in
a century. The normal restoration rate was also strongly influenced by
the loss of native coin, counterfeiting, clipping, sweating, hoarding and
culling, and by the influx of inferior 'easterlins' to compete with native
British issues. Although the king and his advisers soon became aware of
any deterioration in the quality of the coinage, and although most of
the kings of England and all of their counsellors (in contrast to the
situation abroad) were concerned to maintain the quality of the
circulating coin, the large-scale minting required from time to time to
maintain the quality of coins in circulation had by then become a costly
business with no guarantee of substantial profit. There was therefore a
general tendency to postpone and to limit new issues.
The recurring shortage of coins relative to growing demand — a
matter of recorded concern to the Parliaments of 1331, 1339 and 1341 -
was such that the counterfeiter readily stepped in to fill the vacuum,
thereby in effect, if not intentionally, performing a public service.
IN MEDIEVAL EUROPEAN MONEY, 410-1485
171
However, although the counterfeiter performed his dubious public
service (at the risk of losing hand or head) by increasing the quantity of
money, to the extent to which he succeeded, he reduced the quality of
the coinage and hastened the date of the inevitable official restorative
issue, as did the importer of foreign substitutes. When to these
difficulties is added the variations in the relative value of gold and silver
it was a considerable achievement on the part of English monarchs that
they maintained the quality of sterling to such a high degree throughout
the Middle Ages. The fact that England was the first country in
northern Europe to have a single national currency no doubt helped to
maintain the high reputation of sterling, whereas the numerous minting
authorities on the Continent indulged in a form of continuous
competitive devaluation, a profound difference of policy which widened
the gap between sterling and the silver currencies overseas.
The third type of recycling, namely debasement, was therefore
virtually absent for centuries in England and Wales (but common in
Scotland), and when it did occur was very mild compared with that
abroad. Debasement could occur either through making coins of the
same nominal value lighter, e.g. the number of pennies minted from a
given weight of silver, which was a simple 'devaluation'; or more
drastically and deceitfully by mixing cheaper metal with the precious
metal, i.e. 'adulteration'; or, of course, a combination of these two
methods. Not until the middle of the sixteenth century did debasement,
as operated especially by Henry VIII, become of major importance for
royal revenue. As we have seen, the only substantial previous reduction,
and this was in terms of lighter weight rather than adulteration, was
that of Edward III, forced on him by the more rapid debasement of
continental currencies next door to his Calais mint. Further
debasements by weight, for the silver penny and the gold noble and
their subsidiary coins, were carried through by Henry IV in 1412 of 17
per cent and by Edward IV in 1464/5 of 20 per cent. On average all the
devaluations in England over the whole of the previous two centuries
amounted to only one-fifth of 1 per cent per annum, which was hardly
more than the ordinary loss of weight through normal circulation. The
effects on the value of sterling were therefore relatively small. In short,
debasement was not really a problem in England before the sixteenth
century.
An indication of the wide extent of the differences as between
English and continental debasement is given in the following
comparison. Whereas the weight and content of the silver penny had
been maintained practically unchanged for four centuries before 1250,
the equivalent coins in France had fallen to around one-fifth of their
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THE PENNY AND THE POUND
original value, as had those of Milan. Venetian silver coinage
depreciated to one-twentieth of its original value during that period.
Between 1250 and 1500 even the pound sterling fell in weight by a half,
and while the rate of depreciation of the silver currencies of France,
Milan and Venice moderated, they still fell by 70 per cent, that is at a
rate still appreciably greater than sterling. It was in the quality of their
gold florins and ducats that the Italian mints took justifiable pride.
Generations of historians have praised the moral qualities of English
kings in yielding less to the temptations of debasement than did
foreigners. Some of the reasons for this difference have already been
given but we should however add the warning that superior-quality
money does not necessarily indicate a superior economic performance.
Sound money is no guarantee of a sound economy, either today or in
the Middle Ages. In matters of finance as in matters of trade, it was the
foreigner with his poorer-quality silver coinage and his superior
supplements and substitutes, such as gold and especially the paper bill
of exchange compared to our wooden tally, who led the way.
Consequently one should at least raise the question of whether
medieval England was crucified on a cross of undebased silver.
Admittedly, at this distance of time it is unlikely that anyone will be able
to come up with a convincing answer. Nevertheless, unless such
questions are raised, there is a danger of almost unconsciously equating
praise for the moral qualities of English monarchs and their
parliaments in upholding sterling with the unjustified assumption that
the result was good for the economy in general - that what was good
for the sovereign was good for the kingdom. The persistence of the
external drain, the incentive given to counterfeiting, the peculiarly
English insistence on using the primitive and clumsy tally are all
indications that the quantity of money tended over the long run to lag
behind demand.
Whilst this is not an argument for saying that bad money is good, a
posthumous apotheosis of Gresham, it should however inhibit the
equally false, damaging and insidious convention that intrinsically
good money is necessarily good for the economy. There is a tendency
among historians with a natural bias towards numismatology, such as
Sir John Craig and, to a lesser extent, Professor Grierson, to stress the
qualitative superiority of sterling without equally stressing its possible
drawbacks. Feavearyear and Cipolla occupy a more neutral position
and draw welcome attention to problems of quantity, or relative
scarcity, inherent in maintaining the quality of sterling. Professor
Cipolla puts the points lucidly thus: 'It is apparent that during the
Middle Ages the countries which experienced the greatest economic
IN MEDIEVAL EUROPEAN MONEY, 410-1485
173
development were also those which experienced the greatest
debasement' (Cipolla 1981, 201).
The two views of money, one emphasizing the quality, and the other
the quantity, of money are duplicated in similarly contrasting views
about the quality and extent of the use of credit in medieval trade.
Bishop Cunningham, writing at the end of the nineteenth century, was
an early proponent of a 'primitivist' view of English credit, minimizing
its importance: 'Transactions were carried on in bullion; men bought
with coin and sold for coin . . . dealing for credit was little developed,
and dealing in credit was unknown' (Cunningham 1938, 1, 362, 463). In
contrast Lipson, Postan and, above all, Spufford have propounded more
'modernistic' beliefs (Lipson 1943, I, 528 f£; Postan 1954; Spufford
1988).
To some extent monetary constraints were alleviated by the growth
of credit, not only in the special form of the tally but also in a variety of
other ways of which we have a wealth of records. According to
Professor Postan 'there cannot be many topics in the history of the
Middle Ages on which the evidence is as copious as on credit' (1954, I,
63). The records of the larger and more important of such credits were
formally 'recognized' by judicial tribunals and, after the passing of the
Statute of Burnell of 1283, were centrally registered on special rolls.
Although the abundance of these and of many similar but less official
records of debts clearly demonstrates that credit commonly entered into
commercial practice, unfortunately it leaves open the question as to the
relative importance of credit as opposed to cash transactions.
Wholesale trade in wool, cloth, wine, tin and so on was heavily
dependent on credit, with the great Italian merchant banking houses,
those of Bardi, Peruzzi and Ricardi being among the most prominent.
All stages in the woollen clothing industry, although organized
technically on the domestic system, were typically based on the
wholesale extension of credit. Sales of land and of rents, which modern
research shows to have been much more common than was formerly
believed, were commonly conducted through extending credit. As we
have already seen with regard to the tally and the bill of exchange, a
significant proportion of such activities was 'fictitious' rather than
'real', a means of hiding the illegal payments of interest, but the great
majority were genuine transactions pointing to the growing and
pervasive use of credit in medieval trade - not only in London and other
ports but also inland.
Such evidence enabled Postan to demolish a view strongly held by
earlier economic historians that dealing for credit was little developed,
and to cast doubt also on the belief that dealing in credit was unknown.
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THE PENNY AND THE POUND
The evidence already given of the discounting of tallies and of bills of
exchange shows clearly that dealing in credit had also in fact long been
fairly common in medieval England. Whereas the quality of sterling
was, if anything, relatively too high because its quantity was limited, both
the quality and quantity of its credit instruments were crude and limited
compared with the use of credit in the main financial centres of Europe.
The prohibition of usury undoubtedly distorted the money markets of
medieval Europe and tended to favour both a more extensive use of
coinage and a greater recourse to foreign exchange in the form of coins
and bullion and through 'fictitious' bills of exchange than would
otherwise have been the case. Sterling was therefore much more widely
used than simply within the domestic economy, being a preferred silver
currency over much of northern Europe, though playing very much a
secondary role in international trade when compared with the gold florins
of Florence or Ghent, or the ducats of Venice (Spufford 1988, 321, 381).
Despite its sterling qualities, England remained a backward, primitive
country in European terms, just as did Europe compared with China,
throughout the Middle Ages, a feature made more and more obvious by
the wider contacts and by the marked growth in trade towards the end of
the period. Thus in the middle of the fifteenth century England was still,
according to Professor D. C. Coleman,
on the near fringes of the European world, economically and culturally as well
as geographically . . . Aliens still controlled about 40% of English overseas
trade . . . London was overshadowed in wealth and size by the great cities of
continental Europe, and nothing in England even began to match such a
manifestation of wealth and power as the Medici family controlling the
biggest financial organisation in Europe. (1977, 48)
Although the continuity of economic life makes almost any precise
date dividing medieval from modern times artificial and arbitrary, there
would appear to be no sufficiently strong reason, from the point of view
of financial development, to depart from the traditional date of 1485 or
thereabouts. The end of the Wars of the Roses in 1485 plainly
demonstrated the end of baronial power since all their fine castles, when
put to the test (with the exception of Harlech) had been easily subdued by
modern weapons. Already the longbow had, in the course of the previous
century and a half, brought the knight in armour down from his high
horse and so symbolized the end of feudalism. But it is not so much the
fading of the old as the brilliance of the new which puts the appropriate
dividing date conveniently near to the time when Henry Tudor plucked
Richard Ill's crown from the thorn-bush in Bosworth Field. It would seem
to be essential, therefore, to take the end of the Middle Ages as occurring
IN MEDIEVAL EUROPEAN MONEY, 410-1485
175
just before the discovery of the New World by Columbus in 1492. The fall
of Constantinople in 1453 provides a similar, roughly contemporary
marker.
The modern monetary age thus began with the geographic
discoveries, with the full fruition of the Renaissance, with Columbus
and El Dorado, with Leonardo da Vinci, Luther and Caxton; in short
with improvements in communications, minting and printing. A vast
increase in money, minted and printed, occurred in parallel with an
unprecedented expansion in physical and mental resources. The
inventions of new machines for minting and printing were in fact
closely linked in a manner highly significant for the future of finance.
At first the increase in coinage was to exceed, and then just to keep pace
with the increase in paper money; but eventually and inexorably paper
was to displace silver and gold, and thereby was to release money from
its metallic chains and anchors. The apparently complete victory of the
abstract over the concrete, the triumph of fiction over truth, provides
the main theme and interest of the story of the five centuries from
Columbus to Keynes.
5
The Expansion of Trade and Finance,
The most spectacularly obvious difference between the old era and the
new was the discovery by Europeans of the New World of the West
Indies and, at least in outline, North and South America, most of
Africa, South-East Asia, and, after a long pause, Australia and New
Zealand. The great oceans of the world had been opened up through
the daring of the European seaman, supported by royal sponsorship
and joint-stock finance. In less than a decade following Columbus's
first voyage of 1492, the size of the world known to Europeans was
more than doubled. Within a generation it was more than trebled. In no
other age of history has geographical knowledge become so suddenly
and breathtakingly extended. Thereafter new geographical discoveries
suffered universal diminishing returns, and exploitation of the partially
known replaced investigation of the vast unknown.
Of much more importance initially than the discovery of new lands
was the finding of new routes to the already well-known trading centres
of the ancient East. Among the many strong motivations, this was
probably the main reason behind the early voyages of discovery.
Authoritative records of the motives of the early Portuguese explorers
make it 'clear that none of them ever trouble themselves to sail to a
place where there is not sure and certain hope of profit' (Needham
1971, IV, 529). Columbus was known to be much impressed by Marco
Polo's published accounts of the wealth of China and wished to achieve
on a much greater scale by sea what had previously been interruptedly
accomplished to a very limited extent by the traditional overland
caravans. Consequently up to Columbus's death in 1506 he had
What was new in the new era?
THE EXPANSION OF TRADE AND FINANCE, 1485-1640
177
remained singularly convinced that the (West) 'Indies' which he had
discovered were just useful stepping-stones to the wealth of Japan,
China and India. His voyages were therefore seen by his sponsors as
well as by himself as simply complementary to the whole series of
expeditions from Portugal and Spain, culminating in Vasco da Gama's
successful arrival in India in 1498 via the aptly named Cape of Good
Hope, previously the Cape of Storms. Apart from the belated, almost
obsolete, crusading motives and the new spiralling, political and
nationalistic rivalries, the main and constant inspiration which spurred
the voyages of discovery was the profit to be derived from trade.
Not least among the desires of the richer sections of European
society were the luxuries of the East - fine cottons, silks, carpets,
porcelain, spices - including cinnamon, mace, cloves, ginger and pepper
- indigo, slaves, pearls, precious stones, and above all the precious
metals. Greed for gold was always a most dominant motive and it was
the influx of precious metals which had the most direct and obvious
effects on monetary developments in Europe, first in Spain and
Portugal, but subsequently spreading in turn through Italy, France, the
Low Countries and the rest of Europe, including Britain, during the
sixteenth and seventeenth centuries. Thus, when it came to the objects
traded - apart from the fish off the Grand Banks of Newfoundland and
the crops indigenous to North America such as tobacco, potatoes,
tomatoes, etc - it was not their exotic novelty but rather their quantity
which gave a special significance to the age of discoveries. Again this
was to be most easily seen with regard to first gold, and then silver,
where the quantities previously available either locally in Europe or
imported by the mainly overland routes from Africa and the Near and
Far East, had become woefully inadequate in the face of rising demand,
but were now to be vastly supplemented by capture from the Aztecs and
Incas and by new mining methods applied to the rich mines of the New
World.
The novelty of the Renaissance has been very much called into
question by historians of the mid-twentieth century. It was no doubt a
brilliant exaggeration to call the Renaissance 'the discovery of the
world and of man'. Nevertheless, a new dimension in the trade of ideas
accompanied, reflected and partially accounted for the new
geographical discoveries. It may well be true that traditionalists laid
excessive emphasis on the rise of the Ottoman empire and the capture
of Constantinople in 1453 as causes of the dispersion of Greek scholars
to the West and consequently of the rebirth of classical scholarship. But
whatever the exact chronology, the resultant 'contraction of Europe' in
the Near East was a vital factor in the expansion of Europe in the Far
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THE EXPANSION OF TRADE AND FINANCE, 1485-1640
East and in the new West, while the disruption of the ancient trade
routes at the very time when demand for eastern luxuries was rising
increased the relative scarcity of such goods and therefore the potential
profitability of discovering sea routes to the East.
Production for a larger market, production involving new modes of
transport over much wider distances and requiring much more time
between its initial stages and acceptance by the final customer - all
these factors had deep monetary and financial implications, including
significant improvements of the embryo capital, money and foreign
exchange markets. For each stage in the chain of production, and for
each link in the chain, more finance was needed and in a form which
would minimize the greater risks involved. Greater reliance on
expanding amounts of gold and silver for wholesale trade was not
enough. Supporting developments were also needed, including wider
use of quasi-monetary instruments such as bills of exchange and
extended reckoning for credit purposes in additional moneys of
account. The pooling of resources was another essential method of
reducing the novel risks associated with overseas trade to dangerous
and far-away destinations, with the result that new experimental forms
of equity capital were developed from which the basic structure of
modern capitalism, the joint-stock company, eventually evolved.
Printing: a new alternative to minting
The three inventions which together provided the springboard for the
new era, namely the mariner's compass, gunpowder and printing, all
had Chinese antecedents, though printing may have been independently
invented in Europe, especially in the form of movable metal types
locked in a printing press. Modern runaway inflation is often literally
seen as being due to resorting to the printing press, with, for example,
all the German banknote presses of 1923 pressed into 24-hour service to
provide the flood of notes in which the Weimar Republic was eventually
drowned. It is one of the gentler ironies of history that German
banking, minting and printing had very much closer causal
contemporary connections than are generally supposed. Indeed the
development of money as we know it would have been impossible
without the printing press, while from the earliest days of printing,
governments have fallen to the easy temptations of the press. China led
the way in this as in so many others. Although China had produced
block -printed books before AD 800, the modern press was invented by
Johann Gutenberg in Mainz in about 1440, where he produced the
world's first movable-type printed book in 1456. To finance his
THE EXPANSION OF TRADE AND FINANCE, 1485-1640
179
experiments he had borrowed 1,600 guilders from Johann Fust, a local
banker, between 1450 and 1452. Inventors are not usually much good at
running their affairs profitably. Gutenberg was no exception, while
Fust, in contrast, was particularly hard-headed and hard-hearted. So
aggressively impatient did Fust become, not only to see a positive return
on his promising investment but also to seize the lion's share of any
profits, that in 1455 he sued Gutenberg for repayment of capital and
interest amounting to 2,026 guilders. When judgement was given in
Fust's favour he foreclosed on his loan and installed his future son-in-
law, Peter Schoeffer, to run the business instead of Gutenberg. Thus it
came about that the world's first printed book to contain the date and
place of publication, 14 August 1457 at Mainz, and the first to use more
than one colour, the Great Psalter of 1457, was published by Fust the
banker and his junior partner, Schoeffer. Thereafter the business never
looked back, for if ever there was an invention whose time had come,
this was it. By the year 1500 there were presses of the Gutenberg type in
more than sixty German towns and in every major country of Europe
except Russia. During the course of the fifteenth century more than
1,700 of the new printing presses were in operation and, including over
100 books of English literature printed by William Caxton in
Westminster, between fifteen and twenty million copies of books had
been printed.
An explanation of the rapidity of the spread of the new printing
presses is to be found not only in the obviously huge pent-up demand,
hungry for books of all kinds, but also in the fact, less obvious, but
equally important economically, that the supply of the new presses was
easily made available because traditional olive oil and wine presses had
long been familiar in the very regions — southern Germany, northern
Italy and much of France - closely surrounding the birthplace of the
new invention. The outer framework and much of the basic structure of
the printing press could thus readily be adapted from existing designs
for oil and wine presses. Thus the huge potential demand was quickly
and effectively answered with an elastic supply. For the same reasons
competition among rival suppliers caused Europe to have a network of
this vastly improved new 'internal' means of communication to com-
plement the external geographical discoveries.
In due course the printing press designs became modified so as to
lead to a significant improvement in the minting of coinage, a process in
which, as mentioned briefly already, Leonardo da Vinci (1452—1519),
that most brilliant all-rounder of the Renaissance, was himself actively
involved. He was known to be a friend of Luca Pacioli, a mathematician
and accountant, with whom he shared an interest in the new printing
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THE EXPANSION OF TRADE AND FINANCE, 1485-1640
machines. Leonardo's mechanical drawings, held by many to
demonstrate his original genius at its best, include detailed working
designs for mechanical minting in the form of a press to produce both
faster and more uniform coins. Faster production methods were
urgently needed to cope with coining a high proportion of the increased
output of the precious metals, already becoming available from new
mines close at hand in the Tyrol and, later, by the flood of imports as a
result of the geographical discoveries of the treasures of the New World.
Leonardo's achievements in supporting improvements both in printing
and in minting are, belatedly, given full recognition by A. P. Usher in his
History of Mechanical Inventions (1962, 212-39). Sir John Craig (1953,
117) in contrast dismisses Leonardo in a line and a half.
Usher reproduces the working sketches and the detailed notes of
Leonardo's printing press, and goes on to show how 'the utilisation of
machinery to attain precision is further and perhaps more notably
illustrated by Leonardo's projects for the improvement of the process of
coinage'. He made provision for a water-driven mill driving seven
hammers from a single shaft, a widely adopted innovation, so that the
new money came to be called milled money.
Although the introduction of the modern technique of coinage was long
attributed to the goldsmiths and coiners of Augsburg and Nuremberg, it is
now held that the beginnings of the new processes are to be found in Italy.
We know that Leonardo was occupied at the Papal mint, though there is no
record of any coins being struck under his supervision . . . His work was
that of the forerunner - the work of conception. (Usher 1962)
In Europe, however, the knowledge that printing money could be a
direct substitute for coining it took nearly two centuries to discover, and
it was a further century before the abuse of the printing press was to
lead to an inflationary flood of banknotes. It is appropriately to China,
where paper, printing and the banknote were first invented, that we
must turn for the world's first demonstration of banknote inflation. As
a result the Chinese people lost all faith in paper money and became
more than ever convinced of the virtues of silver, a conviction which
lasted right up to the early part of the twentieth century. Because
Europe in the fifteenth and sixteenth centuries had no real experience of
banknotes, such an inflationary medium was not then possible. Instead
its rulers debased the only acceptable and trusted form of money,
namely coinage. Only when people have built up faith and confidence
in a monetary medium is it possible for the authorities to take
advantage of that faith. In China, paper money had enjoyed a long and
trusted history before that trust was - or could be - destroyed. In
THE EXPANSION OF TRADE AND FINANCE, 1485-1640
181
Europe a shortage of bullion led first to a new wave of metallic
debasement, which in turn eventually led the monetary authorities back
to the issuing of full-bodied, intrinsically sound coinage. It is, however,
a further irony of monetary history that, not long after China finally
abandoned its paper currency, European banks began increasingly to
issue paper money notes about which they had first learned from the
writings of travellers like Marco Polo, now suddenly widely becoming
available in printed versions. Thus printing enabled Europeans to enjoy
a renaissance not only of ancient classical civilizations but also of
certain aspects of modern Chinese civilization, though without heeding
the Chinese example of the dangers of paper-based hyper-inflation.
The rise and fall of the world's first paper money
Whereas in our account of the origins of proper coinage we had to cast
doubt on Chinese claims to precedence, there is no gainsaying the facts
of Chinese leadership in the systematic issue of banknotes and paper
money. A short-lived issue of Chinese leather-money, consisting of
pieces of white deerskin of about one foot square, with coloured
borders, each representing a high value of 40,000 cash, dates from as
early as 118 BC. There ensues a very considerable gap of 900 years before
we hear of the next significant reference, this time to paper banknotes
of a more modern type, in the reign of Hien Tsung (806-21). It appears
that a severe shortage of copper for coinage caused the emperor to
invent this new form of money as a temporary substitute for the more
traditional kind. Another experimental state issue appeared around 910
and more regularly from about 960 onwards. By about 1020 the total
issue of notes had become so excessive, amounting in total to a nominal
equivalent of 2,830,000 ounces of silver, that vast amounts of cash were
exported, partly as a form of 'Danegeld' to buy off potential invaders
from the north, and partly to maintain China's very considerable
customary imports, leading to a cash famine within China. The
authorities attempted to replace the drain of cash by even greater
increases in note issues, thus giving further sharp twists to the
inflationary spiral. A perfumed mixture of silk and paper was even
resorted to, to give the money wider appeal, but to no avail; inflation
and depreciation followed to an extent rivalling conditions in Germany
and Russia after the First World War' (Goodrich 1957, 152).
From time to time private note-issuing houses flourished, increasing
the inflationary pressures and helping to devalue the official issues. By
1032 there were some sixteen such private houses, but the bankruptcy
of some of these led the authorities to proscribe them all and replace the
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THE EXPANSION OF TRADE AND FINANCE, 1485-1640
private notes with an increase in the official issue, with note-issuing
branches in each province. As the old issues became almost worthless,
so they were replaced with new issues until the total outstanding issues
of these too became excessive. Thus, for instance, though a reformed
new paper note was issued by Emperor Kao Tsung in 1160, by 1166 the
total official issues had swollen to the enormous nominal value of
43,600,000 ounces of silver. 'There were local notes besides, so that the
empire was flooded with paper, rapidly depreciating in value' (Yule
1967, 149). A series of inflations thus became interspersed with
reformed and drastically reduced issues of paper, with the reforms
effective only so long as the note issues were strictly limited.
With the rise of the Mongol empire, China became part of a vast
dominion extending from Korea to the Danube. 'To standardize the
currency throughout Asia, the Mongols adopted the paper money of
China', and so repeated its financial history on an even grander scale
(Goodrich 1957, 174). The Mongols' first note issues, of moderate size
only, date from 1236; but by the time of the first issues of Kublai Khan
in 1260 the note circulation had again become substantial. It was
Kublai's note issues which were eventually brought to the attention of
the western world by Marco Polo, who lived in China from 1275 to
1292. His tales of paper money were at first met with disbelief.
However, in view of its subsequent importance, a brief reference to his
account is relevant here. In Chapter XVIII of his famous Travels,
entitled 'Of the Kind of Paper Money issued by the Grand Khan and
Made to Pass Current throughout his Dominions', Marco Polo gives the
following description.
In this city of Kanbalu is the mint of the grand khan, who may truly be said
to possess the secret of the alchemists, as he has the art of producing paper
money . . . When ready for use, he has it cut into pieces of money of
different sizes . . . The coinage of this paper money is authenticated with as
much form and ceremony as if it were actually of pure gold or silver . . . and
the act of counterfeiting it is punished as a capital offence. When thus
coined in large quantities, this paper currency is circulated in every part of
the grand Khan's dominions; nor dares any person, at the peril of his life,
refuse to accept it in payment. All his subjects receive it without hesitation,
because, wherever their business may call them, they can dispose of it again
in the purchase of merchandise they may have occasion for; such as pearls,
jewels, gold or silver. With it, in short, every article may be procured. When
any persons happen to be possessed of paper money which from long use
has become damaged, they carry it to the mint, where, upon the payment of
only three per cent, they may receive fresh notes in exchange. Should any be
desirous of procuring gold or silver for the purposes of manufacture, such
as drinking cups, girdles or other articles wrought of these metals, they in
like manner apply at the mint, and for their paper obtain the bullion they
THE EXPANSION OF TRADE AND FINANCE, 1485-1640
183
require. All his majesty's armies are paid with this currency, which is to
them of the same value as if it were gold or silver. Upon these grounds, it
may certainly be affirmed that the grand khan has a more extensive
command of treasure than any other sovereign in the universe. (Dent 1908,
202-5)
Even the Mongols failed, however, to spread the note-accepting habit
to the citizens of the satellite states around the perimeter of their power,
although short-lived imitative systems were developed in parts of India
and Japan between 1319 and 1331. By far the most celebrated
experiment, which brought knowledge of the Chinese system much
closer to the West, was that in the kingdom of Persia in 1294. The
depletion of the Persian king's treasury, as a result of the decimation of
Kazakh's herds of sheep and cattle following an unusually severe winter,
caused him to attempt to replenish his revenues by issuing 'chao' or
paper money as in China. 'On 13th August 1294 a proclamation
imposed the death penalty on all who refused to accept the new
currency. Considerable quantities of Ch'ao were then prepared and put
into circulation on 12th September' (J. A. Boyle 1968, V, 375). However
the experiment, which lasted barely two months and was confined to
the city of Tabriz, turned out to be a complete disaster, with the bazaars
deserted and trade at a standstill. According to Professor Boyle,
perhaps the most noteworthy aspect of this short-lived experiment is
that it was the first recorded instance of block printing outside China. It
is likely that the West first 'learned about printing from the commonly
used paper money that was printed not only in Peking but also in
Tabriz' (Goodrich 1957, 179). The first clear description of printing
available to western scholars appears in a 'History of the World' written
by Rashid al Din, a physician and prime minister of Persia around this
period. His work, which became well known in European libraries also
'contains much information on China, especially on the use of paper-
money' (Needham 1970, 17).
Rashid al Din's accounts were contemporary with, and so reinforced,
those of Marco Polo. Together they helped to shorten the learning curve
by which the West belatedly availed itself of Chinese experience. Thus
the world's first hyper-inflation to be based on paper banknotes, took
place nearly 1,000 years ago, while the first Chinese books on coinage
and numismatics and on the dangers of paper money, preceded those in
the West by some 400-500 years. In 1149 Hung Tsun published the
Chhuan Chih or a Treatise on Coinage, 'the first independent work on
numismatics in any language . . . For European numismatics we have to
await the late sixteenth century' (Needham 1971, II, 394). According to
Sir Henry Yule's 'Collection of Medieval Notices on China', 'the
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THE EXPANSION OF TRADE AND FINANCE, 1485-1640
remarks of Ma Twan-lin, a medieval Chinese historian are curiously
like a bit of modern controversy,' which he demonstrates by quoting
Twan-lin: 'Paper should never be money (but) only employed as a
representative sign of value existing in metals or produce ... At first
this was the mode in which paper currency was actually used among
merchants. The government, borrowing the invention from private
individuals, wished to make a real money of paper, and thus the
original contrivance was perverted' (Yule 1967, 150). In this way China
experienced well over 500 years of paper currencies, from early in the
ninth until the middle of the fifteenth century. By 1448 the Ming note,
nominally worth 1,000 cash, was in real market terms worth only three,
while after 1455 there appears to be no more mention of the existence of
paper money circulating in China (Yang 1952). This was still some years
before the concept was to enjoy a successful renaissance in the West,
and nearly three centuries before printed banknotes became at all
common. The West was eagerly ready for printing, where the small
number of different type characters required for alphabets of only
around two dozen letters provided an enormous advantage in ease of
mechanization compared with the many hundreds required for Chinese
characters. But the West was not yet ready for printed banknotes.
Instead the printing machine was modified, as we have seen, for minting
coins. Thus the minting press and the printing press shared a common
parentage, occurring about the same time, developed in their earlier
stages by the same inventors, sponsored by the same merchants and
princes, and together playing a significant part in helping to bring
about a common revolution in finance, trade and communications.
Bullion 's dearth and plenty
It is the important conclusion of Dr Challis, in his expert study of
Tudor coinage, and confirmed by the complementary work of Professor
Gould, that 'In respect of the coinage, as in so many other fields,
England was integral with Europe', so that she shared in the general
shortage of bullion in the first half of the sixteenth century, even to the
extent of adopting the sinful continental habit of debasement, and
similarly experienced the mixed blessings of the influx of bullion from
the New World during the second half of the century (Challis 1978,
300). Since Britain's economic and financial development was thus so
closely connected with those wider economic and political forces
influencing Europe and beyond, we shall first look at those aspects
influencing the flows of bullion into western Europe before examining
their impact on the financial history of the Tudors and early Stuarts.
THE EXPANSION OF TRADE AND FINANCE, 1485-1640
185
The preoccupation of Europeans with the precious metals was long
criticized by nineteenth- and early twentieth-century writers as a
glaring example of the obvious follies of mercantilist doctrine. In truth,
however, there was a very considerable degree of justification for the
emphasis upon gold and silver in the sixteenth and seventeenth
centuries, and for according bullion a very high priority as an incentive
in the search for new avenues of trade. Quite apart from the importance
of bullion as 'the sinews of war' (a feature to be examined more fully
later), there were a number of excellent reasons for seeking gold and
silver, the old, tried and tested commodities, in preference to many of
the more exotic commodities that they were discovering, but which had
a far more limited, experimental and riskier market than did the
precious metals. Second among these advantages was their high value-
to-weight ratios, all the more important given the vast distances now
being regularly travelled for the first time in history. Although some of
the new commodities, especially the spices required to make the salted
meat of Europe palatable, also had, from time to time, exceptionally
high value-to-weight ratios, these occasions were sporadic, hardly ever
general or universal. In particular, spices could not long command high
scarcity prices, except initially in Europe; and even here the natural
scarcities, intensified by artificial 'corners', were in due course
interspersed by long unprofitable periods of 'glut'. In other words there
was a limited market in spices compared with an almost unlimited
market for the precious metals. A few bags of pepper unloaded in
Amsterdam or London could quickly depress its price far more than
many tons of silver could depress the price of silver.
The exotic products of the East typically enjoyed a limited, inelastic
demand in Europe, coupled with a long-term elasticity of supply in and
from the new lands. Three examples of the resultant volatility of prices
(highlighting the steadier high values of the precious metals) must
suffice. As early as 1496 the importation of the new Madeira sugar
caused a serious slump of sugar prices in Spain. It was one of the
innumerable 'corners' in pepper, organized by the Dutch in 1599, which
was the immediate cause of the founding of the London East India
Company. So low did the price of nutmeg slump in Amsterdam in 1760
that in an effort to raise prices, a huge quantity of mace and nutmegs
was burned (Masefield 1967, IV, 287-8). On a few exceptional
occasions pepper was indeed preferred to the precious metals, being not
only more than worth its weight in gold but used also on occasions as a
unit of account. However these were precisely those occasions when
normal gold and silver money was so scarce that resort had to be made
to barter, to wages being paid in kind 'and to ersatz currencies like
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THE EXPANSION OF TRADE AND FINANCE, 1485-1640
pepper on the busiest markets' of northern Italy (Day 1978, 4). Such
crisis conditions quickly disappeared as soon as adequate supplies of
the precious metals became available later. Thus in contrast to the
extreme volatility of the market for spices, gold and silver were almost
universally acceptable at high, though not inflexible, value-to-weight
ratios, even when they became very much more plentiful as a result of
the discoveries of new mines and new methods of mining.
The precious metals, especially gold, acted not only as a major
incentive to the princes and merchants who sponsored or organized the
voyages of discovery, but also and much more directly to the ships'
crews, from their captains down to their humblest seamen. Thus Pierre
Vilar, in his History of Gold and Money states that Columbus's diary of
his first voyage makes mention of gold at least sixty-five times, while a
prize of 10,000 maravedis promised by King Ferdinand and Queen
Isabella to the expedition's first seaman to sight land in the New World
- who turned out to be Rodrigo de Triana - was selfishly claimed by
Columbus himself (Vilar 1976, 63). More normally, however, so
interdependent for their very lives were all members of the crews of the
small ships of that time, that, despite the iron discipline of the captains,
some not inconsiderable share of the spoils could be expected by each
member. It should not be forgotten, as Professor Kenneth Andrews
graphically reminds us, that piracy was elevated to a preferred branch
of policy by Britain, France and Holland as a means of obtaining a
share of the riches of the New World claimed exclusively by Spain and
Portugal. There were thirteen known English expeditions, supple-
mented by an unknown number of other piratical missions, to the
Caribbean in the eight years 1570-7. From many of these all those crew
members lucky enough to survive returned with small fortunes, such as
Drake's expedition of 1573 (K. R. Andrews 1984, 119-31). Thus, quite
apart from smuggling, the actual flows of specie exceeded probably to a
substantial if unknown degree the total of the statistics compiled from
more official sources, which naturally could not take adequate
cognizance of piracy, plunder and illicit trading.
The precious metals were also avidly and steadily demanded in the
East which, in demonstrating for the next three centuries that it was 'the
sink of the precious metals', kept their values higher in the West than
they would otherwise have been. One of the main reasons for this was,
of course, the fact that many of the products which the Europeans
produced were not keenly demanded in China or India, whereas their
exotic products, on the contrary, enjoyed a keen and growing demand in
the West. The lure of the precious metals therefore remained
untarnished in the eyes of European merchants, all the more so since
THE EXPANSION OF TRADE AND FINANCE, 1485-1640
187
they provided an almost unfailing means of securing the luxuries of the
East in exchange. England's famed wool and woollen cloth exports,
keenly demanded all over Europe, were naturally scorned in the warmer
countries of the East. The gap in the balance of payments could most
conveniently be filled by the precious metals, especially silver, which
generally enjoyed a higher ratio to gold than it did in the West. In this
way total world trade was lifted to a far higher pitch than would
otherwise have been possible, precisely because of this almost universal
but varying preference for gold and silver. Consequently, fluctuations in
the flow of specie relative to changing demands had a most pervasive
and long-lasting effect on general economic development, as well as on
money and prices both in the East and in Europe.
The 'Great Bullion Famine' of the fourteenth and fifteenth centuries
was all the more keenly felt because of the still rather elementary state
of European banking even in the most advanced centres of northern
Italy and southern Germany. Over most of Europe trade depended
fundamentally on adequate supplies of ingots and coinage, so much so
that economic progress was held back by a persistent tendency for
supplies to lag behind demand. 'Europe's indispensable but inadequate
stock of bullion and coin, besides being subject to irretrievable loss in
the process of coinage and recoinage and through "fair wear and tear",
fire, shipwreck and forgotten hoards, was constantly being eroded by
the large-scale export of gold and silver in all forms to the Levant' (Day
1978, 5). As already indicated, the return of barter, the introduction of
fiat moneys of account and also the general decline in prices were all
expressive results of the long-term bullion famine.
Portuguese probing along the African coast from the 1450s onward
provided a new route for sub-Saharan gold channelled principally via
Ghana and Mali. The increased supplies of gold then gradually raised
the relative value of silver in Europe and increased the viability of
European silver mines. This process, once begun, was intensified by the
new supplies of gold reaching Europe from the West Indies during what
has been called the Caribbean 'gold cycle' of 1494-1525. Briefly this
consisted of first depriving the native Indians of their gold possessions;
they did not use gold for money but mainly just for ornament. Then the
natives were forced to work long hours in arduous conditions to pan for
alluvial gold. Within a generation or less, disease and overwork
practically wiped out the original Indian population of the initial gold-
producing regions, and the first gold cycle was completed (Vilar 1976,
66-7). 'Out of all this emerged the profits of merchant financiers such
as the Fuggers and Welsers of Augsburg' (Spooner 1968, 24).
Thus silver mining, minting and banking grew together in a notable
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example of profitable vertical integration. By the middle of the sixteenth
century, however, a veritable flood of silver from Potosi brought about a
sharp decline in the mine-owners' monopolistic mining profits, although
by then they were successfully diversifying still further into a wide range
of financial and industrial activities. Most of the German mines were
closed down, leading to a wide dispersion of many of their skilled
workers to such up-and-coming places as Almaden in Spain, Keswick in
Britain and Potosi in 'Peru'. These were among the first of what were to
be the much more powerful and widespread effects of the lure of the gold
and silver of the New World on production, employment, migration and
prices during the mid-sixteenth to the mid-seventeenth centuries.
Potosi and the silver flood
In the first half of the sixteenth century up to about 1560 the relative
increase in gold exceeded that of silver; in the second half that situation
was dramatically reversed, again with far-reaching effects on world
trade and money. Until 1560 gold imports to Spain represented more
than half the value (but less than one-twentieth the weight) of silver.
Before concentrating our attention on the vast increase in silver from
Mexico, Venezuela and 'Peru' (then a vast area which included Potosi,
now in Bolivia) it is useful to recall the main features in the exploitation
and exportation of gold from the New World. After the Caribbean
sources had been exhausted, the next substantial amounts of gold came
into Spanish-held territories on the mainland, with the period from
about 1500 to 1530 being dubbed by Vilar as almost exclusively the age
of gold, with silver production in those areas then being negligible.
When from 1530 to 1560 silver production began to rise again its value
was eclipsed by the sudden and huge increase in gold supplies following
Pizarro's conquest of the Incas during his famous expeditions of
1531-41. Hamilton has calculated that, according to detailed records of
gold production kept by the 'House of Commerce' in Seville, something
between 1,000 and 1,500 kg of gold came into Spain from the New
World each year on average between the years 1500 and 1540 (E. J.
Hamilton 1934, 42). This was soon to be swamped by an upsurge of
silver output from Mexico and Peru amounting to something around
300 tons per annum in the best years.
The Potosi deposits were discovered by Diego Gualpa in 1545 in a
'silver mountain' of six miles around its base on a remote and desolate
plateau, 12,000 feet above sea level. From being virtually uninhabited,
for it was a most forbidding location, the population, entirely of
immigrants, rose rapidly to 45,000 by 1555, and to a peak of 160,000 in
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189
1610. The full exploitation of its resources depended on two factors:
first the organization of a system of forced labour, and secondly the
application of the newly discovered mercury process to enable cheaper,
faster and fuller extraction of silver from its ores. The mines were so
remote that, even more than in most mining areas, prices of everyday
products were prohibitively expensive. Thus, despite the nominally high
wages paid, insufficient free labour was attracted to enable full
exploitation. Consequently the voluntary labour was supplemented by
a conscript labour force, the 'mita' system, whereby all Indian villages
within a certain radius of the mines were allocated a quota of their
population to be sent to the mines. The mercury amalgam process of
silver extraction was introduced first to the Mexican silver mines of
Guanajuato and Zacatecas, with the mercury imported all the way
from Almaden in Spain. However, in 1563 very productive mercury
deposits were discovered at Huancavelica, situated between Potosi and
the port of Lima, capital of Peru. Although it still took some two
months for the trains of llamas to reach Potosi, this was still a far easier
and more reliable journey than the long route from Almaden.
Huancavelica supplied between a half and two-thirds of all the mercury
used in the Americas, in the 100 years following its discovery, the other
one-third or so still coming from Almaden. Without this mercury, the
life of the American silver mines would have become very limited, not
only because of the high costs of importing mercury from Spain but
also because it would not have been worthwhile making use of the vast
quantities of low-percentage silver ores once the richer seams, naturally
chosen first wherever possible, had become exhausted.1
The outpouring of silver to Europe produced a flood of pamphlets,
articles and books in attempts to analyse its results, particularly with
regard to responsibility for the long-term inflation in Europe in the
sixteenth and first half of the seventeenth centuries. Most accounts
concern themselves rather too exclusively with the influence of the
precious metals on European economies, and tend to underestimate or
ignore their effects on the economic fate of the Far East, except to the
extent that the precious metals were re-exported from Europe.
However, quite apart from the indirect drain to the Far East to
compensate for Europe's chronic balance of payment deficits, the New
World also exported its silver directly to the East in specially authorized
ships for many decades. This direct export at its peak exceeded the
indirect leakages which have captured the academic headlines.
1 John Hemming (1993, p. 59) reminds us that the humble potato, which originated in
Peru, now produces annually a world harvest worth many times the value of all the
precious metals taken from the Inca empire by its conquerors.
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THE EXPANSION OF TRADE AND FINANCE, 1485-1640
Dr Atwell of the London School of Oriental Studies has amply
demonstrated that the import of New World silver into China 'played
an important part in the pace of China's economic development . . . but
ultimately proved to be a mixed blessing and did much to undermine
the economic and political stability of the Ming Empire (1368-1644)
during the last few decades of that dynasty's existence' (Atwell 1982,
68). There were several routes by which Peruvian and Mexican silver
reached the Far East, of which the most important were the direct
sailings from Acapulco to Manila and thence to China. In the peak year
of 1597 some 345,000 kg of silver were shipped by this route. In
addition, silver in considerable amounts arrived in China via Buenos
Aires, Lisbon, Seville, Amsterdam, London and from Goa and other
colonial possessions in India, some legally, other shipments illegally. Dr
Atwell indicates that silver from Chinese domestic mines during much
of the fifteenth and sixteenth centuries had declined so much that the
annual total was exceeded by the silver carried in just one Spanish
galleon from Acapulco to Manila. With a population of 100,000,000 the
world's most advanced economy had become dangerously dependent
for its basic monetary supplies on New World silver. For as long as this
source remained plentiful, Chinese commercial activity prospered, but
eventually 'the sharp decline in bullion imports (from about 1640) had
disastrous consequences for the late Ming economy. Without sufficient
supplies of silver, many people in China were unable to pay their taxes,
or rents, repay loans, or in some cases even to buy food' (Atwell 1982,
89).
Compared with its effects on China, at first stimulating and then
debilitating, western Europe, with the exception of Spain (which
changed its view of the New World specie from being God's bounteous
blessing to becoming the curse of the devil) escaped lightly. On balance
it probably gained considerably, despite the excessive emphasis
conventionally placed on the role of the new specie in the price
'revolution' of 1540 to 1640, to be examined shortly. However, before
looking at the causes and consequences of this overblown inflation in
which England, like the rest of Europe, was closely involved, we shall
see how the Tudors and early Stuarts coped with their own closely
related fiscal and monetary problems at home.
Henry VII: fiscal strength and sound money, 1485-1509
Henry VII's first task was to reunite the country's previously warring
factions so that internal peace and prosperity could again flourish after
an absence of almost a century. Throughout his reign he showed himself
THE EXPANSION OF TRADE AND FINANCE, 1485-1640
191
to be a dedicated master of administration, keeping above all an
especially firm grip on the purse strings. He extracted every penny of
his legal dues, employing Morton with his infamous 'fork' and the
notoriously keen Dudley and Empson for this purpose. His control of
spending helped to swing the money pendulum towards higher quality.
He modified the usual royal administrative and judicial machinery
under the frightening authority of the Star Chamber, thus combining
personal control with carefully delegated powers. In the days when the
fortunes of royalty and those of government administration were still
far from being clearly distinguishable but were properly considered to
overlap to a considerable degree, the wealth of the monarch, and
especially whether it happened to be rising or falling, was highly
relevant to fiscal, financial and, indeed, to constitutional history in
general. Parliament voted Henry his customary dues for life: Henry
insisted with unusual efficiency that these came his way. To Henry
sound money was essential to sound government, and 'no previous
English King had ever realised so fully that money was power' (Pugh
1972,116).
It was not that the mint in normal circumstances contributed
anything more than a marginal amount to the king's finances. As Dr
Challis has pointed out, Henry's average annual net return from
operating his mints came to only between £100 and £200, a trifle when
ordinary revenue was around £113,000 (1978, 248). Nevertheless
Henry's same characteristics of ruthless penny-pinching efficiency were
soon applied to his dealings with his mints, which were ripe for a shake-
up. Henry's achievements in raising the general quality of the coinage to
a very high standard are all the more remarkable, given the state of the
coinage he had taken over from the defeated Richard III. Though not
officially debased, the currency had suffered more than its usual share
of wear and tear, clipping and counterfeiting, sweating and selective
culling during the long period of the Wars of the Roses (1455-85). Good
domestic currency was extremely rare, and much use had to be made,
illegally, of imported European and Irish coinage, almost all also
grossly underweight. Even the official scales sold by the mint for
checking permissible coinage weights were found to be incorrect.
Slackness and malpractices at the various mints were far too common.
An example was made of one such unfortunate mint coiner who was
hanged at Tyburn in 1505.
Before dealing with the important matters of the ways in which
Henry improved the currency we may dwell for a moment on an early if
unimportant lapse on his part, namely the issue of 'dandyprats', in
order to indicate how even as sterling a character as Henry could, at a
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THE EXPANSION OF TRADE AND FINANCE, 1485-1640
time when he was particularly hard-pressed, temporarily yield to the
temptation of using the mints for a quick if small profit. Dwarf, sub-
standard coins, deprecatingly dubbed 'dandyprats', nominally worth a
penny, but soon circulating at only a halfpenny, were issued by Henry to
help finance the siege of Boulogne in 1492. This short-lived
misdemeanour was soon, however, corrected. Perhaps the two greatest
numismatic events for which Henry is justly remembered are the first
issues of coins exactly corresponding to the two age-old units of
account, the pound and the shilling. Henceforth these abstract
accounting units were to have their concrete counterparts in actual
media of exchange, eventually considerably simplifying retail trading,
while also supplying a heavy gold coin for larger, wholesale
transactions. The quality of both these new coins was of the highest,
the designs being made by Alexander of Bruchsal, who was brought
over from Germany, and quickly came to merit to the full his
description as 'the father of English coin portraiture'. Sir John Craig
has made the bold claim that 'modern coinage begins with the shilling
of Henry VII', while Sir Charles Oman similarly heaps superlative
praise on the sovereign as 'the best piece ever produced from the English
mint' (see Craig 1953, 100).
The shilling, also called the 'testoon', carried by far the best profile
portrait of the monarch produced up till then on any English coin.
Similar improvements were made in other silver coins, e.g. the groat,
half-groat and penny, and in the gold ryal (10s.) and angel {6s. 8d.).
Numismatically, therefore, there is no doubt that the quality of English
coinage had been raised by Henry to an enviable excellence which stood
in brilliant contrast both with what had passed for currency previously
and still more when compared a generation later with the monstrous
debasements carried out by his son. Chronologically the sovereign came
first, being issued significantly in 1489, not only in order to imitate the
heavy gold units then being issued on the Continent, but also to impress
Europe with the power, prestige and success of the new Tudor dynasty
(Challis 1978, 49). The shilling or testoon was not issued until 1504, but
despite its excellence as a coin, was issued in such small amounts as to
have little immediate economic significance. This contrast between the
numismatic and economic importance of the coinage — where quantity
and not just quality is the main concern of the latter - is also seen,
though to a lesser degree, with regard to the sovereign. A marked
encouragement to bring bullion to the mint so as to remedy the
shortage of good coin was made when in 1489 the seigniorage and
coinage charges were substantially reduced, from Is. 6d. to Is. 6d. per
lb for gold and from Is. 6d. to Is. for silver. Although there were other
THE EXPANSION OF TRADE AND FINANCE, 1485-1640
193
factors influencing the result, there would appear to be little doubt that
this reduction in mint charges was at least partially responsible for the
average annual output of the mints doubling in the four years after 1494
compared with the similar period before 1489, with the silver output up
from £5,334 to £9,116 (+71 per cent) and gold up from £8,207 to
£18,425 (+125 per cent).
It took about seven years for the reduction of the mint price and the
drive to supply new coins to satisfy the demand and so to enable the
series of royal proclamations against the circulation of severely worn or
clipped domestic coin and against foreign coin to become reasonably
effective. By the end of the first decade of the sixteenth century it had
become obvious that the general quality of England's coinage had been
transformed. Royal proclamations were of course not infallible. It had
taken several years to move the considerable influx of substandard Irish
pennies and the even greater amounts of 'Roman' groats and half-
groats issued by the Holy Roman Emperor, despite the continued
administrative attempts to remove the former, and to prohibit the latter
by the specific 'Proclamation Against Roman Coins' of 1498.
Though, compared with many of his other achievements, Henry
VII's currency reforms may appear of secondary importance, this view
would decry the quiet, undramatic but persistent benefits that good
money brought to a country where commercial activities were not only
obviously of central importance, but were at the beginning of a period
of sustained growth. Henry had supplied a basic ingredient for growth,
for when he died 'there was not a single coin in issue (which is of course
not the same as in circulation) which he had not either introduced or
modified, a point which tends to confirm the old-fashioned view that in
England the Middle Ages ended when he came to the throne' (Porteous
1969, 151).
Henry VII's reformed currencies were maintained with few
significant changes well into the reign of his son. For sixteen years,
apart from changing the VII into an VIII, the father's fine portrait was
retained on all issues of the large silver coins, constituting a most
incongruous and misleading example of 'like father, like son'. However,
in contrast to Henry VII's prudent economy and his ability to contain
his expenditures well within his receipts, Henry VIII in his later years
felt himself quite unable to cope without raiding the monasteries and
picking the pockets of the people. These interconnected events, together
with the religious reformation of which they were part, dominated
the economic and financial history of the mid-fifteenth century. The
contrast between the monetary successes of Henry VII and the
adulterations of Henry VIII have been neatly summarized by Sir
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THE EXPANSION OF TRADE AND FINANCE, 1485-1640
Charles Oman as a move from 'the finest, the best executed and the
most handsome coinage in Europe' to 'the most disreputable looking
money that had been seen since the days of Stephen - the gold heavily
alloyed, the so-called silver ill-struck and turning black or brown as the
base metal came to the surface' (1931, 244). We turn now to account for
these glaringly contrasting financial experiences.
The dissolution of the monasteries
With the disadvantages of hindsight - which not infrequently enables
historians to jump quickly to the wrong conclusions — it would at first
seem credible to suppose that the profits, whether from the dissolution
of the monasteries or from debasement if properly extracted, would
have sufficed for the financial objectives which Henry VIII had in mind.
However, that monarch would have been unimpressed when offered the
kind of choice between alternatives beloved of economists, and in reply
to the question 'which' would by inclination invariably answer 'both'.
In fact there was no straight choice between one or the other: there was
no master-plan either for all-out confiscation of the wealth of the
Church nor a once-and-for-all general debasement of the coinage. Both
were tackled a bit at a time, each supplementing the piecemeal proceeds
available from the other, until ultimately both sources were pressed for
all they could yield.2
Although apparent precedents for both dissolution and debasement
had occurred on a number of previous occasions in Britain, those of
Henry VIII stand out as unique by virtue of their scale and rapidity,
compared with which the previous examples were minor, gradual affairs.
Furthermore, whereas the two policies had previously been unconnected,
they were now to become contemporaneous and complementary events,
the one, debasement being reversible, the other, dissolution, turning out
to be irreversible. Though overlapping in time and largely in objective,
they are, for ease of exposition, better dealt with separately.
The motives which prompted Henry VIII to take over possession of
the monasteries were - including of course the religious - social,
educational, financial and political. There can be no doubt, however,
that by far the most important single cause was the king's desperate
need for money to finance the defence of the realm. Henry VIII is justly
renowned as 'the father of the Navy'. It was a costly business to equip
the new ships and to build up the coastal fortifications in preparation for
the inevitable conflicts such as the wars with Scotland in 1542 and
2 Compare Constantine's seizure of gold from pagan temples; see above, p. 107.
THE EXPANSION OF TRADE AND FINANCE, 1485-1640
195
France in 1543. It was defence and other similar costs which were
specifically claimed in the various preambles to the Acts and Orders of
the Suppression of the monasteries, shrines and priories as justification
for the king's actions, as well as the unsurprising denunciations of the
immorality and laxity of the monks. A recent authority on the history of
the dissolution, Professor Woodward, has left us in no doubt as to the
main reason for this series of confiscatory events. 'Finance is indeed
the key to the proper understanding of the dissolution . . . the primacy of
the financial consideration in governmental thinking ... is to be seen in
the title of the department established to supervise the dissolution, the
'Court of the Augmentation of the Revenues of the King's Crown' (1966,
4). Woodward has estimated that the total number of religious houses in
1530 in England and Wales was about 825, made up of 502 monasteries,
136 nunneries and 187 friaries. Their wealth came largely from being
very extensive landlords, and it was mainly from their agricultural
estates that they derived a gross annual income of up to £200,000.
Official estimates in 1535 gave their net annual income as £136,000, but
Woodward considers this to be a considerable underestimate, and puts
the true net figure as 'nearer to £175,000, or nearly three-quarters as
much again as the average annual income of the Crown' (1966, 122).
This potential of nearly trebling the average ordinary revenues of the
Crown was, however, never fully achieved for a number of reasons, the
chief one being that the king's desperation for money meant that he was
forced hurriedly to sell off much of the capital and so sacrifice what
could have been an enormous annual increment to his income.
Henry's first attempt to increase the amount of revenue was not
aimed at the monasteries alone but was a general imposition on the
Church as a whole. Thus was the First Fruits and Tenths Act of 1534.
This Act was almost immediately followed in the same year by the Act
for the Suppression of the Lesser Monasteries, namely those with an
annual income of less than £200. This comprised some two-thirds of
the total of 502 monasteries, though only about one-third of those
eligible for suppression were in fact dissolved under that Act. As soon
as the bulk of the immediately realizable resources of this first
suppression were used up, and with the pressures of expenditures still
riding high, Henry authorized an extension of his policy of dissolution
by suppressing the friaries in 1538 and the larger monasteries, mostly in
1539, though a few had already been 'voluntarily' persuaded to
surrender their rights to the Crown in 1538. By 1540 the dissolution of
all religious orders had been completed. The relatively few ecclesiastical
guilds which remained were disendowed as the final part of the same
policy by Edward VI in 1547.
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THE EXPANSION OF TRADE AND FINANCE, 1485-1640
The pressing need for money meant that the king began selling off
parts of his monastic property almost as soon as it came into his hands,
sacrificing future income for present gain. The most liquid of assets,
namely all the gold and silver candlesticks, crosses, plate, together with
jewels and so on, were speedily transferred to London, much of it to be
coined or sold for cash, except for the best ornamental pieces, which
were retained for the royal palaces. Excluding these latter pieces, the
gold and silver sent to London were valued at £75,000. Although not all
the monasteries were physically destroyed many of them were stripped
of everything of value, including especially their bells and the lead from
their roofs and gutters, the bells being melted and recast as cannon,
while much of the lead was exported. Records of the values of proceeds
sent to London are fairly complete, and these are usually the figures
quoted in later texts; but where local sales took place no reliable
consolidated figures of the total value of such sales appear to exist, but
these are believed to have added quite substantially to the Crown's
liquid resources. The most important fixed capital assets were of course
the vast landed estates, sales of which began immediately and were
carried on at a fairly steady pace, and at a steady price, in real terms,
equivalent to twenty years' yield, directly for over a decade, and
indirectly through a chain of agents, London merchants, and at least a
number of specifically confirmed speculators for many decades
subsequently. Most of the land went to purchasers who were already
substantial landowners, although opportunities also existed for the
newly rising gentry to acquire smaller and medium-sized estates.
Although most of the liquid spoils from dissolution had been sold
within a decade, the Crown still retained considerable estates itself and
decided, probably on Thomas Cromwell's advice, to dispose of much of
the land by lease for limited periods, so that these lots reverted to the
Crown at the end of their lease. The royal estates were also considerably
increased by confiscations and escheats. Consequently, sixty years after
the dissolution the Crown still owned substantial amounts of what were
previously monastic lands, so that although the Court of
Augmentations came to an end in 1554, the Augmentations office of the
Exchequer continued to administer its 'monastic' lands. As Tawney has
shown in his controversial but stimulating essay on 'The Rise of the
Gentry', 'between 1558 and 1635 Crown lands to the value of
£2,240,000 had been thrown on the market', including £817,000 sold by
Elizabeth, £775,000 by James and £650,000 during the first decade of
Charles I's reign. Additionally Charles made sales approaching a
further £2,000,000 during the Civil War (1642-9). Tawney also
confirms the views of previous experts on Tudor finance, views in turn
THE EXPANSION OF TRADE AND FINANCE, 1485-1640
197
reflected by more recent research, that 'few rulers have acted more
remorselessly than the early Tudors on the maxim that the foundations
of political authority are economic' and consequently 'had made the
augmentation of the royal demesne one of the key-stones of their
policy' (Tawney, 1954, 194-5).
Recent historians of the dissolution (such as Professors Woodward
and Youings) have tended to play down the claims of the traditionalists
that the dissolution was 'one of the most important events in the Tudor
period or, indeed, in the whole of England's history', and have stressed
other factors which, together with the dissolution, also played their
part, e.g. the rise of the gentry, the increased secularization and
commercialism of the Tudor Age, the confirmation of the Protestant
Reformation, the increase in enclosures and in the market for land, and
so on (Woodward 1966, 163). While such research thus moderates the
extreme views of the traditionalists, it tends to confirm the economic,
financial and fiscal importance of the dissolution, which is brought out
with clarity and much statistical verification, especially by Professor
Woodward. Taxation, dissolution and debasement were the three
channels through which the Crown drew the revenues necessary to
carry through its extraordinary duties of defending the realm at a time
when the ordinary revenues were no longer sufficient to cover even the
costs of normal, peacetime administration.
It was typical of Henry VIII, the rogue elephant of the Tudors, that he
saw no reason to curtail his private expenditures, so that while such
worthy public defence expenditures as repairs to Dover harbour, and to
the fortifications of Calais, the south coast, etc., figure largely in the
preambles to his acts of taxation, he still diverted large sums towards the
construction of his palaces, 'over £1,000 in the financial year 1541—42
alone' (Alsop 1982, 22). In a desperate search for additional finance,
innovations in taxation necessarily accompanied the drastic experiments
in dissolution and debasement. No longer could the king 'live of his
own'. Thus in the course of research on 'Innovations in Tudor Taxation',
Professor J. D. Alsop reaffirms 'the presence of significant novelty within
Tudor subsidy acts' (i.e. taxes), and 'confirms that taxation is most
appropriately studied in relation to, and as a central aspect of, the
evolving nature of Tudor finance' (1984, 91). However despite all the
money squeezed by Henry VIII from taxing his subjects and from
confiscating the property of the religious orders, he was still, in the early
and mid-1540s, desperately in need of additional resources. Therefore,
while his land sales were still proceeding, he turned to see what ruthless
exploitation of the coinage could bring into the royal coffers.
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The Great Debasement
The 'Great Debasement' of English history actually began, as it was to
end, in Ireland, with an issue of 'Irish harps' in 1536, containing
roughly 90 per cent of the silver in the similar coins then being issued by
the English mints. This first, moderate, debasement was apparently
accepted without demur, and so encouraged a further debasement in
Ireland in 1540 and then in England in 1542, from which later time the
general Tudor debasement is usually dated. Among the first to receive
the debased Irish coins were members of the English army in Ireland.
They had little choice but to accept, as did the Irish with whom they
spent their pay (Challis 1978, 81-111).
However, the very much larger issues required in England demanded
a more complex and subtle approach, at first based on attempting to
secure the voluntary co-operation of the public. Before briefly charting
the rake's progress of Tudor debasement we should remind ourselves
that debasement has the three following possible elements: first the
crying up, or calling-up, of the coinage, which means simply giving new
coins, which in all essentials are the same as the previous issue, an
officially decreed higher nominal value; secondly there is the not
logically dissimilar method of making coins smaller or lighter, though
of the same officially designated values as previously and out of
precisely the same purity of metallic content; thirdly there is the process
of making the metallic content of the coins out of cheaper metals than
were previously used and officially attempting to enforce their
acceptance as if they were issued in the previously unadulterated form.
The Tudors were guilty of all three kinds of debasement and in practice
it often became difficult to disentangle the degree of importance or, as
we might nowadays say, the weight, to be attached to any one
combination of these three elements of a debased currency.
Not all three forms of debasement were considered to be equally
deplorable. In fact the first form, namely the enhancement of the values
of either gold or silver, were fairly common and acceptable devices
which had to be resorted to from time to time in order to try to keep the
values of existing coinage in line with current bullion prices. If bullion
prices were to rise substantially above their mint equivalents more coins
would be leaked from domestic currency to foreign markets or would
find their way into the melting-pots of the goldsmiths. The process
would, of course, go into reverse whenever the price offered by the
English mint exceeded bullion prices or the prices offered by foreign
mints. Where an element of rightly deprecated debasement crept in was
in those cases where the official enhancement of values noticeably
THE EXPANSION OF TRADE AND FINANCE, 1485-1640
199
exceeded that justified by differences between the mint and bullion
prices. Following a considerable drain of gold to the Continent in 1526,
involving considerable losses of sovereigns valued domestically at £1,
the sovereign was cried up to 225., with similar enhancements for the
gold angel. Such enhancement was insufficient and the drain continued
so that, later in the same year, two related methods were tried: the
sovereign was enhanced to 225. 6d. and the new sovereigns and other
gold coins were issued not at the previous standard of 23.75 carats but
for the first time at a lower standard of 22 carats.
However, all these changes were not unlike those previously accepted
as tolerable, moderate changes fully justified by the circumstances of
the time and not to be considered as belonging to the phase of Henry's
real debasement. It was not therefore until the silver coinage began to
be more substantially adulterated in the 1540s that the debasement
movement really got under way. The Irish experiments had proved that
the mints could become a much more profitable source of finance for
the hard-pressed monarch.
Debasement was therefore a matter of degree and of conscience.
Moderation might be successful in the sense of being generally accepted
by the public since, with so many of the coins in general circulation
being imperfect and underweight, even the new coins, as normally
marginal additions to the currency, would seem preferable to the
average coin in circulation. However, success in the sense of being
accepted by the general public (if not by the professional money-changers)
implied relatively modest profits for the Crown. If greater profits were
sought then, by some means or other, attempts had to be made to
hide from the public the degree of debasement actually being
achieved, at least long enough for the king to receive his initial gains.
Debasement thus became literally a hidden form of taxation from its
inception.
Deception alone would not have been enough since professional coin
exchangers, bullion dealers and merchants quickly became aware of
such deception. The main engine of debasement was the official
announcement of a higher mint price so as to induce voluntary
offerings by such professionals of existing coin and bullion to the mint
in order to receive more new coins, admittedly of a lighter, adulterated
or enhanced valuation, from the mint. In other words the mint price
had to be substantially increased in order to increase substantially the
voluntary flow of silver and gold coins, bullion and plate to the mint.
With regard to plate, the vast amounts coming from the monasteries,
chantries and shrines were fed straight into the mint, and since
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THE EXPANSION OF TRADE AND FINANCE, 1485-1640
these were involuntary supplies they did not of course require the
inducement of a higher mint price. As Professor Gould has shown, in
his authoritative, interesting and detailed study of the subject, it is
certain that 'during the Great Debasement there was a substantial
monetization of plate and ornament from the suppressed religious
houses' (Gould 1970, 33). Hence it was no accident that the
'ecclesiastical' mints of Canterbury and York were busily reactivated
as being ideally placed to deal with the new flood of monasterial plate.
In May 1542 a moderate increase in mint price was announced
followed by a series of more substantial increases, beginning in May
1544. Thereafter mint activity rose apace, for it was very much in the
individual interests of those who could do so to take advantage of the
higher mint prices. Thus, as Professor Gould shows in a most
instructive example, if anyone in possession of sixty-four testoons
(shillings) minted in 1544, and then worth £3. 4s., brought them to the
mint for recoining in 1550, he would receive the equivalent of £4. 0s. Qd.
worth of new coins, i.e. an increase of 25 per cent for each pound
weight of silver (1970, 18). Indeed so successful was the king in
attracting supplies to the mint after 1544 that in the following year or
shortly thereafter, six new mints were opened or reopened to help the
original Tower mint to cope with the flood from both voluntary and
'monasterial' sources. Three of these new mints were in London
(another one in the Tower plus one at Durham House in the Strand and
at South wark), while the three others included, as well as those already
referred to at Canterbury and York, a newly built mint at Bristol. The
Tower's Irish coinage, where the first debasement experiments began in
1536, was also supplemented from time to time by issues from the
Dublin mint. During the later stages of debasement the flow of gold and
silver from the general public was greatly reduced, and so the greater
proportion of bullion came from the government itself. One such means
was through arranging loans from the German firm of Fuggers to
purchase supplies of silver directly from its mines.
The process of physical debasement from the original pure sterling
silver standard reached 75 per cent silver by March 1542, 50 per cent by
March 1545, 33V? per cent by March 1546, and reached its nadir of 25
per cent under the young King Edward VI in 1551. The mainly copper-
alloy coins were, in order to improve their acceptability, 'blanched'
from 1546 onwards, by applying a thin surface coating of purer silver, a
subterfuge which quickly wore thin to show the red copper underneath
- hence Henry VIII's well-earned nickname 'old copper-nose'. In
contrast to the gross adulteration of silver, the gold coinage remained
THE EXPANSION OF TRADE AND FINANCE, 1485-1640
201
close to purity throughout the debasement period, its least pure level
being the twenty-two carats (or eleven-twelfths fine) which it had
registered in 1526, and again (after restoration to over twenty-three
carats) in 1542. It was rather through 'enhancement', or crying up its
official price, that the policy of debasement was pursued in the case of
gold, and even then to a much more moderate degree than with the
silver coinage. Thus whereas the mint price of 1 lb weight of fine silver
rose from £2.40 to £6.00 between 1542 and 1551, i.e. 150 per cent, the
mint price of 1 lb weight of fine gold was raised only from £28.80 to
£36.05 during that same period, an enhancement of only 25 per cent.
The degree of change in the silver to gold ratio — from around 12:1 in
1542, to about 6:1 for a short time in the early part of 1551 - was clearly
untenable, and a ratio nearer the customary 12:1 ratio was restored
later in 1551, by almost halving the mint price of silver overnight.
These variations in the relative mint prices of gold and silver were not
readily removed by what we might term 'arbitrage', at least not so far as
the use of coinage within England was concerned, for the coins were
almost invariably accepted at their face values. Although this was truly
a bimetallic period, nevertheless silver was mainly the medium of retail
and domestic trade, whereas gold became, during the debasement
period especially, mainly the medium of wholesale and foreign trade.
This is borne out by the statistics of the exchange rates between London
and Antwerp. Instead of sterling falling to the weighted average of the
silver and gold debasement, the £ sterling fell considerably less than
that average on the Antwerp market, and was much more in line with
the far more moderate debasement of gold. Indeed, in many foreign
contracts the receipt of debased silver coin was unacceptable, while
even the attempts of the King's Council to force foreigners to accept its
declared enhanced price for gold was, much to their chagrin, ignored.
They would not accept the Council's assurance that the pound in their
pockets was not devalued.
The degree to which the fall in the value of the pound on the foreign
exchanges acted as a stimulus to English exports and a constraint on
imports has been very much a matter of lively dispute among economic
historians in the past couple of generations. There are those, like
George Unwin, who argued forcibly that the evils of progressive
debasement followed by the uncertainties of reform, dislocated and
drastically upset trade relations, thus reducing exports as well as
imports (Unwin 1927, 149). Others, like F. J. Fisher, however, argued
equally strongly that, like modern devaluations, after a time-lag (the J-
curve effect as we would say) the cheaper pound led to a huge surge in
exports and a decrease in imports (1940, 95-117). More recent detailed
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THE EXPANSION OF TRADE AND FINANCE, 1485-1640
studies by Professor Gould, Dr Challis and others have demonstrated
conclusively that Professor Fisher's claims were exaggerated, in that the
figures he gave relating to cloth exports from London took insufficient
account first of the continuing exports of wool, and secondly of the fact
that London had for many years been increasing its share of total
national exports at the expense of provincial ports. Basing national
exports on London's experience was therefore bound to exaggerate the
national increase in exports. Nevertheless, despite some debatable
degree of exaggeration, there appears to be a consensus as to the main
point, namely that the Great Debasement had a direct and considerable
effect on terms of trade, raising the price of imports and reducing the
price of exports. Since, however, the degree of gold debasement was so
very much less than the silver debasement, and since money markets
were less perfect in the sixteenth century than today, one should not
attribute too much influence on commodity trade flows to debasement
in the mid-sixteenth century, when there were other powerful structural
factors also at work.
The extent of the profit gained by the Crown during the main period
of the debasement, 1544-51 inclusive, had been considerably
underestimated by economic and monetary historians until the
painstaking researches of Dr Challis and Professor Gould. The main
reason for this was that previous calculations were based almost
exclusively on the output of the Tower mints to the neglect of the
substantial contributions of the other six mints. If during the eight-year
period in question one compares the revised figures of net profits from
debasement, £1,270,684, with the other two main sources of finance
available to the Crown, namely the net yield of all taxation, £976,000,
and the net proceeds from the disposal of monastic properties,
£1,056,786, then debasement is seen to yield more than either taxation
or dissolution (Challis 1978, 254-5).
Debasement had run its main course by mid-1551 and had been
squeezed dry, while the Crown still retained much of the monastic
estates and taxable capacity remained practically intact. The Crown
extracted its profits from debasement by arbitrarily and indeed
fraudulently increasing its 'seigniorage', that is the difference between
the total cost of producing the new coins and their face value, from a
reasonable to a plainly unreasonable extent, and thus increasing the
average annual rate of profit from minting from the negligible £100 or
£200 received by Henry VII to the vast annual average of nearly
£160,000 enjoyed by Henry VIII and Edward VI. Corresponding exactly
to royal gain was the cost to the public - the cost of inflicting on the
country the worst currency it had ever suffered (with the doubtful
THE EXPANSION OF TRADE AND FINANCE, 1485-1640
203
exception of that of Stephen and Matilda). It was the general public -
who possessed and used mainly silver and rarely if ever aspired to gold -
who bore the brunt of the diffused and hidden taxation brought about
by debasement, rather than the richer sections. After all, only 7 per cent
of the Crown's profit came from minting gold, compared with 93 per
cent coming from silver. It was possibly the inconvenience rather than
simply the increase in prices associated with debasement that was the
major burden borne by the mass of the population - a matter which
will be discussed later, as part of our examination of the long-term
general inflation of European prices, in which debasement almost
certainly played a relatively minor, though not unimportant, role.
Numismatically Henry VIII was plainly a disaster. Yet it would be
wrong to judge that gifted, dynamic and hard-pressed monarch too
severely simply by reference to the notoriety which he has earned
through his related policies of dissolution and debasement. Had it not
been for these two admittedly drastic and exceptional forms of
taxation, then either there would have been no strong navy of seventy-
one ships, or the normal burdens of taxation and borrowing would have
been raised to unacceptable levels and thus possibly have brought
forward the constitutional struggle that disrupted the Stuart monarchy
and brought the return of civil war a century later. It was of course not
the least of the advantages of debasement, so far as the king and his
advisers were concerned, that coinage was a recognized royal monopoly
and so its profits were independent of parliamentary approval.
Although the main drive to debase the currency had exhausted its
possibilities in England by mid-1551, the process was continued until
1560 in Ireland, where Henry's debasement policy was, as we have seen,
first tried out. By 1560 Elizabeth decided on a vigorous policy for the
reform of the debased currency.
Recoinage and after: Gresham 's Law in action, 1560-1640
When the nine-year-old King Edward succeeded his father in 1547 his
advisers were forced to maintain the fiscal policies inherited from
Henry VIII. An early attempt to raise the quality of gold and silver
coinage in mid-1547 was doomed to failure as it became obvious that
such attempts were premature; the new king could not do without the
fiscal support of continued debasement. Between 1547 and 1549 various
attempts were made to combine increased purity with decreased
weight, but the result was merely to increase the general confusion. The
confusion and the degree of debasement reached its climax in 1551
when the 'three ounce' silver (i.e. only 25 per cent, full silver being 12
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THE EXPANSION OF TRADE AND FINANCE, 1485-1640
ounce) was issued in April 1551. In October of the same year the policy
was changed; the main period of debasement had come to its inevitable
end. Mint activity was drastically reduced, the mints outside London
(except Dublin) were closed down, the values of the most debased silver
issues were down to half their nominal values, the debased shillings
being revalued at sixpence etc., and the future new issues of most of the
coinage were brought up to or near the customary levels, at least for
England and Wales, though not for Ireland. The existing circulation,
however, still consisted mostly of the base coins issued in the previous
years. Henry's policy of confiscating the wealth of the religious houses
was also maintained not only by the suppression of the chantries in
1548-9 but also with seizure of the gold and silver plate from the parish
churches in 1553 (leaving only the bare necessities for Holy
Communion), a haul which brought in some £20,000 to the depleted
royal coffers. In sum, despite ostentatious efforts at reform, the main
fiscal policies of debasement and dissolution were still being carried
out, insofar as any further yields were possible from these sources, in
the six years of the unfortunate reign of Edward VI.
During the equally brief reign of Mary, the mints were modestly
active, continuing the policy of producing good-quality coinage for
England and base money still for Ireland. Much of the new supplies
came from Spanish coinage purchased by Thomas Gresham, the royal
agent in Antwerp, who was thus attempting to supplant, or at least
supplement, bad money with good. Some of the most numismatically
interesting issues were the sixpence and shilling coins bearing the busts
of Mary and her husband Philip of Spain face to face, another small but
significant example of the growing influence of Spain on English
monetary history. Feavearyear probably underestimates Mary's
contribution to the solution of Tudor monetary troubles not simply by
his repetition of Ruding's assertion that 'the mints were inactive during
most of the reign' (1963, 74), but more importantly by ignoring the
investigations among her advisers on how best to reform the currency.
Despite her strong encouragement to seek a solution, no action was
taken. Nevertheless these preliminary discussions no doubt contributed
significantly, in Dr Challis's view, to the speed with which Elizabeth was
able to take action to end the curse of a thoroughly discredited
currency.
Thus it was not until Elizabeth I had established herself that the
problem of how to reform the deplorably bad coinage in circulation
began to be tackled with any degree of vigour. The dual problem which
had to be solved, if the country were again to enjoy a sound currency,
was not simply to replace the base coins with good, but how to do so
THE EXPANSION OF TRADE AND FINANCE, 1485-1640
205
without saddling the Crown with insupportable costs. In the event this
difficult task was accomplished with complete success - indeed with a
surprising degree of profit coming to the Crown at the end of the
operation. Again, as in the process of debasement, it was the general
public who paid the price for enjoying once more the traditionally high
standards of sterling silver and full-bodied gold - standards generally
higher than those obtaining over the rest of Europe.
The task of replacing bad money with good was a most formidable
one. Although Gresham's Law, that bad money drives out good, was
well known long before Gresham's time, it was justly gaining
prominence at this period because of its extremely urgent topicality and
the enormous size of the debased circulation compared with the
minuscule amount of new full-bodied coins. Consequently if the new
unadulterated coinage were produced at the normal rate to add its
marginal contribution to the existing debased currencies, the new
would immediately have disappeared either legally, by simply being
withheld from circulation, or illegally by being melted down or
exported despite all the legal penalties against such action. Faced with
problems of such a size and complexity, the reform of the coinage would
have to satisfy the following conditions: first the recoinage would have
to be done quickly, otherwise the old would swamp the new; secondly
the scale of the operation would have to be so large as to enable as
complete a replacement of the coinage as possible rather than simply
gradually supplementing the old circulation; thirdly with the same
sense of urgency and on the same large scale, the public had to be
induced to hand in its old debased coinage in return for the new;
fourthly the whole expensive programme had to be carried through
without any final net cost to the Crown; fifthly to provide an initial
supply of bullion to start the process going and to act as a reserve to
meet the inevitable gaps between the flow of new coins into circulation
and the counterflow of old coins back into the mint, it would be
necessary to secure a large amount of gold and silver bullion from
abroad. There were a number of other conditions subsumed in the
above such as the ability to maintain secrecy at certain stages in the
programme, the reinforcement of the fear of the consequences of
breaking the law on the export or melting down of coinage, and the
need to set up an agency network throughout the country to enable the
exchange of currency to proceed as smoothly as possible.
Following a series of detailed investigations in which the queen
herself was directly involved, an agreed plan was adopted and a series of
royal proclamations were issued between 27 September and 9 October
1560 - the current equivalent of a modern 'white paper' - announcing
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THE EXPANSION OF TRADE AND FINANCE, 1485-1640
the government's intention to proceed with the recall, revaluation and
recoinage of all the base moneys, and warning the public that the legal
punishments against exporting or melting coins would be carried out
with the greatest severity. These proclamations also gave details of the
'crying down' or devaluation of the existing coinages (to an extent
sufficiently less than their precious metal content so as more than to
cover the costs of the whole operation). The less debased coins were
devalued by 25 per cent, while the most grossly debased types were
devalued by more than 50 per cent. A final date, 9 April 1561, was given
after which the debased coins would no longer be legal tender, and
further to speed the change a bonus of 3c/. per £1 was given on certain
types exchanged before the end of stipulated dates between January and
August 1561. To assist the public in sorting out the tangle of the various
issues goldsmiths throughout the country were appointed as agents for
such exchanges.
The related difficulties of speed and scale were dealt with by greatly
expanding the Tower mint by building the largest extension of any of
the mints built during the whole Tudor period, by increasing the
number and quality of assayers, craftsmen and metalworkers, a number
of them being attracted from foreign mints, and by introducing for the
first time the latest continental presses for producing 'milled' coin
which, after early failures, eventually markedly improved the quality of
the coins. This, combined with their increased purity, greatly aided
their ready acceptability by the public. The total of base coinage in
circulation has been variously estimated at between the low figure of
£940,000 (given by Sir Albert Feavearyear) and the rather higher and
more precisely accurate figure of £1,065,083 (given by Dr Challis).
Recoinage of anything near such a vast amount could be accomplished
only by taking in the debased currencies, separating the debased
constituent from the varying degrees of precious metals they contained
so as to form the basis of the new issues.
The main contract for separating the copper from the precious
metals was already being negotiated by Sir Thomas Gresham in mid-
1560, and as a result was given in November to a German company
under Daniel Ulstate, which company ultimately separated about 83
per cent of the base metals, with the London company of Peter Osborne
and the mint itself sharing the other 17 per cent. It was Gresham also
who negotiated a loan of 200,000 crowns in Antwerp in January 1560
for the purpose of securing the reservoir of bullion required to
supplement the main supplies coming from the influx of domestic
debased coinage. Since the actual recoinage began only in December
1560 and yet was finished by 24 October 1561, the whole process,
THE EXPANSION OF TRADE AND FINANCE, 1485-1640
207
despite a frighteningly slow start, was actually achieved in a very
commendably short space of time, thus minimizing the difficulties,
bottlenecks and shortages inevitably associated with such a
fundamental change in the basic - indeed almost the only - monetary
medium. The currency had been transformed, its high prestige had been
restored and the whole costly operation had been so finely managed
despite the many difficulties that it yielded a handsome but not
excessive profit to the queen of about £50,000. A grateful queen granted
Sir Edward Peckham and three other mint officials the right to choose
their personal coat of arms. Dr Jeremy Gerhard, when Deputy Master
of the Mint, kindly informed the writer concerning an interesting
coincidence, in that Peckham's choice included the 'cross and crosslets'
design, a feature which came to light again recently when Queen
Elizabeth II granted the Royal Mint, now at Llantrisant (The Church of
the Three Saints), its own smaller three-crosses mint mark, which
appears on the edge of all current £1 coin issues.
Compared with the trauma of the Great Debasement and the
curative surgery of Elizabeth's recoinage, the rest of Tudor and early
Stuart monetary history turned out to be rather humdrum, with just
one exception - the silent secular inflation from about 1520 to 1640,
which baffled contemporary and much subsequent opinion. In
debasement and recoinage the Crown had been betting with a double-
headed penny, extracting profits both through crude adulteration and
cunning recovery, but each time at the expense of the general public.
The public never forgot the lesson and subsequently, until the coming of
modern paper money, never allowed the monarchy to profit
substantially again through debasement or reform, thus relieving the
basic currency of the kingdom from its occasionally heavy fiscal
burdens. By the 1580s Elizabeth's normal average annual income from
the mint was down to around £700, or not more than about 3 per cent
of her ordinary revenue. Her prudence and economy in expenditure,
characteristics she inherited from her grandfather Henry VII, together
with her share of the influx of treasure from the New World and her
propensity to live off the backs of the barons whom she made a habit of
visiting, complete with her courts and royal household, just enabled her
to manage to balance her income and expenditure, despite the rise in
prices which doubled during her reign and quadrupled during the
Tudor period as a whole.
Among the relatively minor monetary problems which deserve
mention were those associated with getting the right proportions of
coin denominations in relation to the demand. The march of inflation
made larger coins more and more necessary, and the Tudors correctly
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THE EXPANSION OF TRADE AND FINANCE, 1485-1640
anticipated the demand with their issues of the golden sovereign and
the silver crowns and shillings. It was the production of these that was
given the greatest, but not exclusive, emphasis in the initial stages of the
recoinage. Indeed so many shillings were issued in 1560 and 1561 that
there was found to be no need to mint any more shillings for a further
twenty-one years. It was at the other end of the range that the greatest
difficulties occurred and from time to time there was such a shortage of
pennies, halfpennies and farthings that local issues of copper tokens
appeared in a number of towns including Norwich, Oxford, Worcester,
and especially Bristol, a town granted official permission in 1577 to
issue £30 worth per annum of copper coin. The main reason why the
official mints tended to produce insufficient small coins lay in the fact
that the rate of payment for producing small coins was unremunerative
compared with that for the larger coins.
A fairly ingenious, though at first sight apparently peculiar, solution
was the issue from 1572 to 1582 of a three-halfpenny and of a three-
farthing coin. The latter could, for example, be given in change for a
penny for any purchase of a farthing's worth of goods and thus to some
extent it obviated the need to use or coin the impossibly small and
unprofitable silver farthing. Silver farthings, like the silver groats, were
no longer issued - with a very few, trivial exceptions. In 1583 the three-
halfpenny and three-farthing issues were discontinued, with the more
normal 2d., Id. and halfpenny coins being issued as usual, until the
silver halfpenny also ceased being issued in the 1650s. The silver penny
continued to be issued right up until 1820 inclusive, thus ending an
astonishing national numismatic record of around 1,100 years. In 1601
the price of bullion having again got out of line with the mint prices, the
weights of the gold and silver coinage were reduced slightly, gold by
rather more than silver, so that the gold/silver ratio was reduced from
11:1 to 10.8:1, just at the time when the plethora of silver was working,
in the rest of the world, to increase the gold/silver ratio. Copper, having
become synonymous with debasement, was not acceptable as
subsidiary coinage until the memory of that era had faded, though
some copper pennies for circulation in Ireland were produced at the
London mint in 1601, another experiment later hesitatingly copied in
Britain. Despite some particular shortages, Tudor tradesmen had a
bewildering variety of coinage denominations to supply their needs,
varying from the heavy 'fine-gold' sovereign (of 979 parts per thousand)
valued at 305., through the 'crown gold' sovereign (of 916 parts per
thousand) valued at 205., the half-pound, crown, half-crown, ryal, angel
half-angel, quarter-angel - also in gold. Silver issues included the
shilling, sixpence, groat, three-pence, the half-groat or two-pence,
THE EXPANSION OF TRADE AND FINANCE, 1485-1640
209
three-halfpence, penny, three-farthings, halfpenny and farthing.
Obviously with such a variety to play the exchanges, traders were not
too discomforted by the occasional lack of particular denominations,
except for the smallest coins where the official issues remained
insufficient to meet demand.
Turning to look at the circulation as a whole, at the peak of the
debasement in mid-1551, the total coinage in existence, which was then
by far the main component of the money supply, stood at £2.66 million.
Whatever may have been the shortages immediately occurring, part of
the increased world supplies of silver found their way to Britain so that,
apart from difficulties between the balance of various coin
denominations, the total circulation began to grow shortly after the
debasement and continued throughout the rest of the sixteenth century.
By 1600 the circulation was thus, at around £3.5 million, one-third
higher even than the swollen total existing at the peak of the
debasement in July 1551, so that, in macro-economic terms, the
aggregate money supply seemed to be quite adequately provided with
its basic ingredient when the last of the Tudors was succeeded by the
first of the Stuarts.
When James VI of Scotland came to rule as James I of England
(1603-25) the union of the crowns led naturally to a partial union of the
coinage, celebrated first with the issue of the gold 'Unite', of exactly the
same weight and purity as the 205. sovereign, from 1604 to 1619. This
was replaced with a slightly lighter 'Laurel', also valued at £1, in 1620.
Not so easily assimilated, however, were the much more important
issues of silver coins, since these were far more debased in Scotland
which had long imitated the worst continental practices. For example,
the Scots' silver mark had to be valued in England at the infuriatingly
inconvenient valuation of 13. 5c/., whereas the English mark was still
nominally worth 6s. 8c/. At last the awkward, niggling problem of
securing an adequate supply of low-value, subsidiary coinage for
Britain as well as simply for Ireland had to be tackled.
To the annoyance of the Crown, the gap was being filled with token
coins, most commonly made of lead. These were issued by a rabble of
unofficial minters, which had grown by 1612 to the huge total of 3,000,
and who paid the king nothing. Because the Royal Mint found the
whole business of copper coinage unprofitable and undignified, and
since it diverted skilled manpower away from the somewhat more
profitable business of coining gold and silver, the king decided to resort
to outside official agents, a device subsequently used on a number of
occasions when the royal mints were under pressure. The first such
outside agent, Lord Harington, began issuing copper farthings under
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THE EXPANSION OF TRADE AND FINANCE, 1485-1640
licence in 1613. His contract had stipulated that half the profits were to
go to the king, who had hoped thereby to gain around £35,000. When,
six months later, Harington died, the total profits had amounted to
only £300. The licence was next transferred to the Duke of Lennox and
thereafter to a succession of hopeful buyers. Similar licences were later
issued by Charles I to the Duchess of Richmond and to Lord Maltravers
until all such private licences were revoked by the Commonwealth
Parliament in 1644. Following this self-righteous act the shortage of
low-value coins intensified, again leading to a mushrooming of
municipal and other private traders' mints all over the country which
issued tokens of copper farthings, halfpennies and pennies on and off
for almost the next thirty years. Finally, in 1672 the Royal Mint itself
took over direct responsibility for the issue of copper coinage. An
interesting example of financial devolution and vertical integration was
shown in 1637 when a branch of the Tower mint was established at
Aberystwyth Castle, its coins being appropriately stamped with a
three-feathers mint mark. Its main purpose was to handle the locally
mined supplies of silver, during a decade when the London mint was
intensively occupied coining vast amounts of silver brought, directly
and officially, from Spain.
Throughout the sixteenth century and the first third of the
seventeenth a considerable proportion of the net bullion supplies
coming to the royal mints had come directly, by way of trade, plunder
or piracy, from the New World, despite all the efforts of the Spanish
authorities to limit such leakages. A new situation developed in the
early part of the reign of Charles I (1625-40) whereby vast amounts of
bullion came directly from Spain to the Tower mint with the full
blessing of the Spanish authorities. It is useful to examine these
fluctuations in the flow of specie in relation to changes in the mint
prices of gold and silver during the first thirty years or so of the
seventeenth century. The gold/silver ratio which, as we have seen, had
overvalued silver in 1601, was responsible for a huge influx of £1.5
million of silver to the London mint in the decade to 1611. This inflow
was abruptly halted in that year, however, when the ratio was altered
again, this time by too much of a margin the other way, favouring gold
and penalizing silver. The result was another even longer-lasting
distortion in mint input and output. From 1611 to 1630 mint activity
was mainly confined to gold, and the minting of silver coinage
practically ceased to be of any importance. Consequently, by 1630 the
general state of the silver in circulation had once more grossly
deteriorated to an unacceptable level - not this time by conscious
debasement, but simply through a combination of natural wear and
THE EXPANSION OF TRADE AND FINANCE, 1485-1640
211
tear and official neglect. Fortunately, by this time also the vast increase
in world supplies of silver had so reduced its price as to make the
unrealistically low mint price fixed in 1611 again attractive enough for
merchants to bring in new supplies of silver, and profitable enough for
the Crown to resume minting. Against this favourable background a
new decade of feverishly sustained activity at the Royal Mint was
ushered in particularly as a result of improved diplomatic relations
between England and Spain. This new situation was signalled by the
Cottington Treaty of 1630, so called after the English ambassador who
negotiated not only the cessation of hostilities but also the detailed
financial agreements which were to have a profound influence on
subsequent monetary developments in Britain.
One of the largest and most persistent of the many drains on Spain's
vast accumulation of gold and silver was the need to pay for her armed
forces abroad and to subsidize her allies in various parts of Europe, as
well as to support the Spanish administration in those parts of the Low
Countries which were still under her control. In addition to the growing
risks from piracy, the recurrent wars with England and Holland ruled
out the possibility of sending supplies through the English Channel.
The Spanish government had therefore come to a long-standing
arrangement with the bankers of Genoa who assumed responsibility for
transferring the specie to Flanders and other parts of northern Europe
as required. The restoration of peace with England in 1630 not only
removed the direct threat of the English navy but had the double
blessing of enlisting that navy as a much-needed source of protection
for the Spanish convoys to the Low Countries from the constant
harassment of the Dutch navy (which hesitated to offend England) and
from that of the Turkish, Barbary and other pirates who roamed the
western Atlantic and the English Channel as well as the Mediterranean.
The Cottington Treaty thus opened a cheaper, better and more direct
route to the Low Countries. Armies and administrators naturally
enough needed ready money rather than bullion, and this urgent
requirement was also neatly supplied by a special provision of the
treaty. Henceforth all the money required to be sent from Spain to
Flanders was first to be sent to London in English ships (for added
security). Furthermore, at least one-third of the bullion was to be
coined at the Tower mint while the remainder was available either to be
subsequently sent on to Flanders or for use in buying supplies by means
of bills of exchange drawn upon Antwerp. The Spanish treaty
confirmed Charles's resolve to strengthen the navy by bringing the total
of seaworthy ships up to eighty, and for this purpose he resorted to the
hated 'ship money' taxes, which in 1634 came to £104,252 and in 1635
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to £218,500 (Dietz 1964, 275). Although discussion of the wider
financial and constitutional effects of ship money is deferred until the
following chapter, it is relevant here to mention these heavy costs as
possibly excusing Charles's determination to extract every penny of
profit from coining the Spanish silver while at the same time
overlooking the glaringly obvious need to replace the existing
circulation. Nevertheless, on the positive side, the agreement with Spain
meant that the Royal Mint was now assured of a vast and profitable
supply of silver. A huge total of something between eight and ten
million pounds' worth of silver was coined by the Royal Mint between
1630 and 1640 which 'was nearly twice the amount coined during the
whole of Elizabeth's reign including the recoinage' (Feavearyear 1963,
91).
What was good for the king and his mint was also good for the coin-
cullers, though not, as it happened, for the currency. If the success of the
Elizabethan recoinage depended upon reversing Gresham's Law by first
devaluing and then quickly taking in the great bulk of the debased
currency, the failure of Charles's policy followed from simply adding the
good, new coinage to the deplorably bad existing circulation. Rarely
has Gresham's Law operated to greater effect, for no sooner were the
new coins issued than they disappeared via the thriving goldsmiths (and
the many agents whom they employed at a payment of 2-3 per cent of
the net proceeds). The new coins were either melted down or exported
with little delay. Notorious among such lawbreaking goldsmiths was
Thomas Violet, who received a royal pardon in 1634 for his
misdemeanours in return for informing on his fellow criminals, a dozen
of whom were brought to justice. Despite all the efforts to prevent
melting or export, most of the Spanish silver had disappeared from the
country by the middle of the seventeenth century.
The so-called price revolution of 1540-1640
It is now time to turn to see how these tidal flows of finance affected the
history of prices in general during the age of the Tudors and early
Stuarts. Whereas the financial effects of dissolution and even of
debasement had generally been relatively neglected by economic
historians until the 1970s, in contrast the history of prices in the
sixteenth century has exerted a magnetic effect on contemporary
writers and historians ever since. While the fascination which the
subject has held for investigators has considerably increased our
knowledge of the prices of various commodities and the wages of
various groups of workers in different regions, the key matter as to what
THE EXPANSION OF TRADE AND FINANCE, 1485-1640
213
were the causes of the inflation remains very much a subject of lively
dispute. One would expect modern monetarists automatically to
explain inflation as being clearly the result of a single simple cause - the
expansion of the money supply relative to any increase in the output of
final goods and services. Conversely modern Keynesians would be
expected to look for a variety of non-monetary, as well as monetary,
causes. The surprising truth of the matter, however, is that practically
all writers up to the 1970s including especially Keynes himself, have
adopted the simple classical approach of giving by far the greatest
emphasis to monetary factors, whereas since about 1970, during the
heyday of modern monetarism the supremacy of monetary factors as
the main inflationary factor has been increasingly called into question.
Before trying to weigh up the relative roles of money supply and
demand as compared with other changes it is as well to remind
ourselves that to modern readers the inflation of the sixteenth and
seventeenth centuries was a piffling affair and seemingly hardly worth
all the ink that has been spilt upon it. Yet during those centuries there
was a general belief that, temporary disturbances apart, there should be
a just level for wages and prices, determined by equity and tradition,
rather than by mere market equilibrium. Furthermore the new inflation
followed a long period when most prices had been either stable or
gently falling, so that when the new long series of unusually sharp price
rises did not fall back to their traditional level, then contemporary
opinion was troubled by events that were both strange and profoundly
unsettling. Thus, although we today might gladly welcome as almost
non-inflationary a rate of price increases which generations of
economic historians have strangely persisted in calling 'revolutionary',
yet on balance with deference to the views and reactions of people
living at the time and, despite the obvious exaggeration, the use of the
conventional term 'the price revolution' may still be accepted. What,
then, were its causes and consequences?
Perhaps the first point which needs to be stressed in these
monetaristic days is that no one simple, single cause can possibly be
sufficient in itself to explain the selective, sustained, widespread and
regionally differentiated rise in prices throughout Europe which lasted
for more than a century. In other words the influx of precious metals
from the New World, though without doubt a vitally important
ingredient, cannot be taken as being so obviously and overwhelmingly
responsible for the nature and extent of the rise in price levels that all
the other influences can be ignored. However, so powerful was
Professor Hamilton's explanation of European inflation being almost
exclusively the result of the influx of American treasure that no less an
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THE EXPANSION OF TRADE AND FINANCE, 1485-1640
economist than Keynes himself adopted his simplistic, monetarist
stance (E. J. Hamilton 1934 and Keynes 1930, II, 152-63). His powerful
advocacy diverted the main body of the subsequent generation of
economic historians away from giving sufficient attention to other
causative factors, and this despite the much more balanced view,
carefully integrating monetary and non-monetary causes given by
Bishop Cunningham at least as early as 1912, but subsequently brushed
aside by the Hamilton-Keynes tide. In accepting Professor Hamilton's
ideas, Keynes laid especial emphasis on his theory of 'profit inflation' as
being the chief cause not only of economic growth but also even of
political power. The fact that the rise in money wages lagged behind
prices for decades gave entrepreneurs plenty of capital to invest
wherever the incentives seemed greatest. 'Indeed the booty brought
back by Drake in the Golden Hind (variously estimated at between
£300,000 and £1,500,000) 'may fairly be considered the fountain and
origin of British Foreign Investment', claimed Keynes, who emphasized
'the extraordinary correspondence between the periods of Profit
Inflation and of Profit Deflation respectively with those of national rise
and decline ... In the year of the Armada (1588), Philip's Profit
Inflation was just concluded, Elizabeth's had just begun' (1930, II,
152-63). Keynes took his contemporary Cambridge historians to task
for making no mention of these powerful economic factors which had
made possible the greatness of the Elizabethan age. No self-proclaimed
monetarist, not even Milton Friedman himself, could make greater
claims as to the power of money, even though the stimulatory effects of
the increased money supplies described by Keynes were critically
dependent on very lagged and weak responses in the labour market.
With the Keynes of the Treatise (1930), money is power: with the
Keynes of the General Theory (1936) money is powerless - a remarkable
change to which we will return in a later chapter.
Professor J. U. Nef of Chicago, a contemporary of Keynes, while
admitting that 'the inflow of treasure from America helped to keep
down the costs of labour and the land needed for mining and
manufacturing', nevertheless warns us against the tempting assumption
that the long period of rising prices was of compelling importance for
the rise of industrialism' (1954, 1, 133). Whereas Keynes referred mainly
to the stimulatory effects of the influx of precious metals on England's
overseas trade, Professor Nef looks rather at internal industrial
developments, and makes the telling point that wages could not have
been depressed so far or so long as Wiebe, Hamilton and Keynes had
supposed, otherwise the home demand for the products of the new
industries of coal, glass, soap, paper, salt, etc. would have been
THE EXPANSION OF TRADE AND FINANCE, 1485-1640
215
depressed rather than expanded. He also showed that the timing of
these industrial developments does not fit very closely to the periods
when overseas silver came in abundance to England in the second half
of the sixteenth century, but rather had already been stimulated by the
earlier periods of monetary debasement. It is no mere coincidence that
the rate of inflation rose to its peak in the two decades following the
beginning of the great debasement in 1542 and that the resulting gap
between prices and wages widened. The resultant increase in labour
unrest led in time to a national codification of local labour customs in
the form of Elizabeth's Statute of Artificers of 1561. Its attempts to fix
wages, to force 'vagabonds and vagrants' into the agricultural labour
force and its lengthening of the standard period of apprenticeship to
seven years may in retrospect be seen as obvious attempts to return to a
traditional stability in industrial relations which had been deeply
disturbed by accelerating inflation.
Some recent writers on the other hand, while drawing overdue
attention to non-monetary causes, are again in danger of going to the
other extreme in dismissing, ignoring or gravely underestimating the
vital role played by the influx of gold and silver. Thus Professor Joyce
Youings, in her stimulating and highly readable history of Sixteenth
Century England, devotes a whole chapter to the twin 'Inflation of
Population and Prices', in which she carefully and painstakingly
underlines the inflationary force of the growth of population. However,
apart from a few scattered references to debasement, she ignores what
must surely be at least as important a cause, namely the increased
money supply. Similarly, while one must agree with her analysis of the
main consequences of the inflation, one can hardly agree to the almost
complete neglect of the money supply. 'The growth of population,'
according to Youings, 'itself the main cause of the increase in prices,
ensured that those who suffered most were those most dependent on the
earnings of wages' (1984, 304).
Why did the increase in population turn out to be so inflationary that
some writers, like Professosr Postan, Youings, Brenner and Maynard
tend, in one form or another, to give it pride of place? Plagues apart, the
increase in population was fairly steady from its low point of little more
than two million in 1450 to about four million by 1600. If the increase
in population had led to a commensurate increase in output, its effect
on prices would have been neutral; if it had been accompanied by a
general increase in productivity, the results would have been positive
and would therefore have moderated the inflationary pressures coming
from other directions. In fact there were a number of powerful reasons
why the increased output - especially in the key matter of foodstuffs -
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THE EXPANSION OF TRADE AND FINANCE, 1485-1640
increased less than proportionately with population. First the
distribution of the population changed, with a pronounced drift to the
towns, especially London. The greater occupational specialization
which accompanied this drift reduced the degree to which people grew
their own foodstuffs and made them more dependent on markets and
retail outlets. Professor F. J. Fisher, in a path-breaking article on 'The
Development of the London Food Market, 1540-1640', shows how
By the early seventeenth century there was a general feeling that the city's
appetite was developing more quickly than the country's ability to satisfy it
. . . The high profiles of landlords were obtained in part by pinching the
bellies of the local poor. The theory that the city was too large became
generally accepted, partly because of this difficulty of obtaining food, and it
became usual to fight unduly high prices by limiting the city population.
(1954,1,151)
Secondly, profits from producing wool, especially for export, led to a
long period of diversion from arable to pastoral farming. Traditional
arable farming was labour-intensive, sheep farming was not. The
unemployment which resulted (for agriculture was as in all 'less
developed countries' predominant) has been graphically portrayed in
Sir Thomas More's vivid description in his Utopia: 'Your sheep, that
were wont to be so meek and tame, and so small eaters, now, as I hear
say, be become so great devourers, and so wild, that they eat up and
swallow down the very men themselves' (1516, Book I). Thirdly, then,
unemployment, caused not only by the enclosure movement, but by all
the other many trials of those ages such as plagues, external wars and
civil wars, was a powerful factor which reduced the actual supplies of
goods, and especially of foodstuffs, below the potential suggested by
the substantial increase in hands. Evidence of unemployment abounds
(in the form of complaints regarding vagrants and vagabonds) from the
days of the dissolution of the monasteries, which made the problem
more obvious, up to 1601 when the Elizabethan Poor Law was enacted
to try to set a national pattern for parishes to copy in dealing with the
problem. Undoubtedly therefore population pressure played a
significant part in helping along the rise in prices, especially of
foodstuffs, during the so-called 'Price Revolution'.
The rise in population thus took the unfortunate form that it led to a
greater increase in final demand than it did in output because of the
lagged and insufficient increase in the productivity of agricultural
labour. This feature helps to show how the increase in prices started to
take place before any significant increase in monetary supplies from the
New World. It also supports Professor Geoffrey Maynard's view that
THE EXPANSION OF TRADE AND FINANCE, 1485-1640
217
the prices of agricultural products rose faster than those of
manufacturing goods because of the lower elasticity of supply of
agricultural goods (Maynard 1962). It was these same pressures of
providing for the requirements of an increased population which
enabled landlords to continue to give further periodic twists to the
inflationary spiral throughout the period 1540-1640 by their insistence
on raising the rents they demanded from their tenants on every possible
occasion (Kerridge 1953, 16—34). Yet, when all allowance is made for
the direct and indirect effects of the substantial increase in population,
the cost-push of rising rents would have been resisted more easily if
product prices had not also been pulled up by an inflated monetary
demand. The excellent advice of Dr Outhwaite, given in his brilliant
summary of this highly controversial subject should be borne in mind:
'We must avoid making population pressure do all the work which was
formerly undertaken by Spanish treasure' (1982, 44). On balance we
might say that the size and persistence of the rise in population
provided an inclined plane upon which the other inflationary causes,
both monetary and non-monetary, exerted all the more effectively their
own particular price-raising influences.
The rise in rents became a matter of repeated, vociferous protest
because it affected an important sector of society. It provides us with a
good example of how people were mainly concerned about increases in
the price of a single commodity or at most in the prices of a narrow
range of goods or services. Despite the many valuable studies which
have been made of particular prices, such as those for grain, or oxen, or
for the wages of agricultural or building labourers, they inevitably
suffer from so many limitations that great care must be used in making
temporal or spatial generalizations based upon them. Wide differences
in regional and international 'baskets of goods', in exchange rates, in
the extent to which people could produce goods for themselves, or were
allowed benefits or perquisites in kind - these and other similar
qualifications would seriously reduce the value of attempts to construct
any wide-ranging index of prices, particularly when the appropriate
weights to be given to its composite items are bound to be largely a
matter of guesswork and during a period when fundamental changes
were taking place in trade and expenditure patterns. Thus, although the
very concept of a 'general index of Tudor prices' would have made no
sense to contemporaries and probably remains impracticable for
modern researchers, nevertheless there was ample evidence of a growing
interest among leading members of society in the sixteenth and
seventeenth centuries concerning the causes and effects of changes in
the general level of prices. The strange phenomenon of prolonged if
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THE EXPANSION OF TRADE AND FINANCE, 1485-1640
moderate inflation, by devaluing everybody's money, had kindled a new
awareness of the related economic problems of the rate of interest, of
the quantity theory of money and of the balance of payments.
Although it would be premature to describe the numerous, intense
views which were being promulgated and published on these matters as
being worthy of being called economic theories, nevertheless the
protagonists were busily producing guidelines which they hoped would
be adopted as official policy. In a sense these guidelines were exercises in
applied political economy. In the course of the following century or so
all this theorizing in bullionism and the balance of payments, on the
relationship between the quantity of money, the level of prices and the
rate of interest, on insurance and on taxation, developed via the rather
narrow quantitatively biased study of 'Political Arithmetic' into the
more general discipline of 'Political Economy'. But first the old
medieval attitudes of mind and methods of computation had to be
swept aside before the newer more commercial and capitalistic views
could prevail.
Usury: a just price for money
Powerfully mixing his metaphors, Professor Tawney in his stimulating
analysis of Religion and the Rise of Capitalism, showed how 'the
revolution in prices, gradual for the first third of the century, but after
1540 a mill-race, injected a virus of hitherto unsuspected potency into
commerce, industry and agriculture, at once a stimulus to feverish
enterprise and an acid dissolving all customary relationships' (1926,
142). One of the most important spurs to commercial activities of all
sorts was the gradual removal of the age-old prohibition against the
payment of interest, a matter which had been debated throughout
Europe for very many decades with little or no result, but which finally
began to show such substantial changes in attitudes in the mid-
sixteenth century that the law itself had belatedly to take note of them.
Aristotle's simple but powerful belief that 'money was barren' and
therefore that interest was unjust, was repeated in various forms both in
the Old and in the New Testament (though the parable of the talents
provided for some a debatable escape clause). In any case, from ancient
times right through to early modern Britain, usury was frowned upon
both by the Church and by the state, which quarrelled regarding the
boundaries between their respective areas of control, all the more
vigorously because of the money involved.
On the basis of 'an eye for an eye' the most common and appropriate
punishment for greedy creditors was the extraction of as large a fine as
THE EXPANSION OF TRADE AND FINANCE, 1485-1640
219
possible - a great temptation to which both Church and state frequently
yielded. Generally speaking however, provided certain niceties were
observed, the law, whether canon or state law, turned a blind eye to the
giving and taking of interest, except at times of exceptional religious or
political zeal, or when the debtors were influential enough to attract the
attention of the political or religious authorities to particularly harsh
instances of extortion. While the Schoolmen argued, kings and popes,
monasteries and republics, merchants and moneylenders, Jews and
Gentiles, Italians, Spaniards, Germans, French, Dutch and English - all
regularly borrowed, often paying high rates for the privilege, despite
what the laws might say. It was partly because it had become so easy to
find ways around the prohibitions that, during the later Middle Ages,
these laws had actually been strengthened, so heightening the intensity
of the debate as to what should or should not be permitted.
The word 'usury' throughout the Middle Ages had been synonymous
with almost any sort of economic exploitation and not simply the
charging of money for a loan. The actions of those who charged
excessive prices for goods simply because they had become scarcer
naturally or by 'engrossing', any form of monopoly or foreclosure, all
were blackened by being called 'usury'. In a society where small
craftsmen and peasants were far commoner than wage-earners and
where free competition was the exception rather than the rule, the
common people were easy prey to economic exploitation. It was their
vulnerability to usury that, according to Wycliffe's sermon 'On the
Seven Deadly Sins' made men 'curse and hate it more than any other
sin'. In other words the question of the removal of usury was not simply
a matter of pleasing the rising commercial interests of the gentry, the
lawyers and the merchants: it was also a matter of protecting the
everyday livelihood of the ordinary village craftsmen and small farmers,
whose vulnerability was just as keenly felt in the sixteenth century as
when Wycliffe preached, in the fourteenth. This fear of exposing the
poor completely to the unscrupulous trader goes a long way towards
explaining why such a seemingly completely anachronistic system as
the maintenance of the ban on usury took such an incredibly long time
to remove - and then only bit by bit. In fact it took no less than 300
years to remove completely the legal ban on usury in Britain. Even then
total laissez-faire in money existed for only the short period of the last
forty-five years of the nineteenth century. In the perspective of history -
even modern history — total freedom for money is very much the
exception and some more or less strict form of control has almost
always been the general rule.
The increasing quantity of money and credit and the even stronger
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THE EXPANSION OF TRADE AND FINANCE, 1485-1640
growth in lending money for commercial rather than simply for
charitable purposes made the medieval attitudes to usury less and less
tenable in the course of the sixteenth century when opinion and
practice in England began to catch up with those on the Continent. By
far the most modern in their approach to financial operations were the
Lombards, or 'Long-beards', who operated not only in northern Italy
but had their agents in all the other important economic centres of
Europe, especially in the 'fair' towns of southern France and the
Netherlands. The prosperity of these areas and the ease with which they
overcame economic and social disasters which devasted other regions
acted as an example to the rest of Europe. Since Milan, Genoa, Venice,
Florence and Sienna were virtually independent city-states, a large
proportion of their business which elsewhere would be considered
regional or local could legitimately be taken as being 'international'.
This was significant because by far the most common and widespread
method of avoiding the ban on interest was to disguise credit
transactions as dealings in foreign exchange. Thus, under the very nose
of the Vatican, the Lombards developed a surprisingly modern money
market successfully avoiding excommunications or fines which were the
Church's usual punishments for usury. Indeed, the Italian banking
houses regularly carried out such foreign exchange transactions on
behalf of the papacy itself. Their system, based largely but not
exclusively on the use of 'international' bills of exchange, became the
basis of the modern forms of banking which were spreading over much
of Europe including Antwerp, Amsterdam and London.
Precept followed practice so that various schools of thought emerged
as academics and theologians began to find ways of modifying the
traditional blanket prohibition of all kinds of usury. The first logical
step in the process of changing accepted views was to allow claims to
payment wherever delays occurred in the repayment of the principal of
a loan. Such a payment by definition could arise only if the originally
agreed maturity of the loan had expired. Such forms of payment
became commonly acceptable and designated as interest ('id quod
interest') and so escaped being stigmatized as usury. A second and more
important step forward was to claim that periodic payments made
during the course of a long-term loan were also legitimate. This first
became regular practice when the Italian city-states began raising loans
(some of them 'forced' instead of taxes) from their citizens. The
arguments as to the legitimacy of such payments divided the
Augustinian theologians, who were against them, from the Franciscans
who were in favour of them. Already in 1403 the celebrated lawyer and
theologian Lorenzo di Antonio Ridolfi successfully won his case on
THE EXPANSION OF TRADE AND FINANCE, 1485-1640
221
behalf not only of his creditors but also of the state debtor, the Republic
of Florence, who did not want this source of funds from its rich citizens
to be denied them. 'In such public lending then, interest was not due
merely because of delay' (Gordon 1975, 197).
The exemptions thus granted to governments and their creditors
were gradually extended to include commercial contracts between
merchants where each was obviously so well able to look after himself
that no possible stigma of extortion was implied. Prominent among the
major creditors of governments were of course just such merchants,
who could, in the prosperous regions around them, always find
profitable avenues for their surplus funds, usually at better rates or with
less onerous conditions than when they were forced, cajoled or induced
to lend to the state. They felt very keenly the sacrifice involved when
they lost the opportunities of making profitable use of their own funds
whenever they lent them to the state. Furthermore since states were
tending to become bigger and bigger borrowers, this problem of lost,
more profitable alternative lending tended to grow ever larger. Such
creditors began to demand, as an openly acknowledged right, rather
than simply as a disguised privilege, an equivalent return from their
debtors in the form of interest. Such payments were deemed 'lucrum
cessans', that is payments for the cessation or loss of profits. As
Professor Gordon and others have pointed out, this is the same thing as
the modern concept of opportunity cost (Gordon 1975, 195). In this
way, payments for delay, for compensation for loss of profit and for a
range of other similar losses became semi-legalized and accepted even
by orthodox Catholic theologians and lawyers, and consequently
excused as 'interest' from the punishments still meted out for those
antisocial practices which could still be construed as usurious.
However, the definition of usury was shrinking as that of acceptable
interest was growing: the financial exception was gradually becoming
the rule.
The Reformation may have hastened the spread of these changes
though, as we have seen, it can hardly be said to have caused them.
Luther, Calvin and Zwingli, though loud in their denunciations of
traditional forms of usury, nevertheless by questioning the very
foundations of the beliefs of the established Church, raised questions
among the public which they themselves failed to answer with clarity, at
a time when others were keen to resolve their doubts. Ironically, Henry
VIII first powerfully opposed the Reformation by publishing in 1521 his
'Defence of the Seven Sacraments', for which Pope Clement VII
conferred on him the title 'Fidei Defensor' or 'Defender of the Faith',
which has subsequently appeared on British coinage for nearly 500
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THE EXPANSION OF TRADE AND FINANCE, 1485-1640
years, either as 'Fid.Def.', or simply as 'F.D.'. While it was more
important matters of state, such as royal marriages and the sovereignty
of the Crown over the Church, confirmed by the Act of Supremacy of
1534, that caused the rift with Rome, nevertheless its relevance to usury
follows from the fact that once this break had been accomplished, there
was no longer any overriding ecclesiastical impediment to the long
overdue clarification of the legalization of the payment of interest.
Thus, it so happened that the first Act to legalize the payment of
interest in Britain was passed in 1545, when Henry was in the middle of
his programme of debasing the coinage. Money and credit were equally
capable of being manipulated by the monarch without undue
parliamentary or ecclesiastical opposition.
The statute of 1545 is therefore of paramount importance in the
history of usury and consequently in the history of money and banking
also. Despite strongly upholding the traditional condemnation of usury
in its preamble, it is the first official instance of the open acceptance of
practices which though they had already become indispensable to
England's economic life, had always been carried out under a cloud of
debilitating suspicion. As well as paying lip-service to the old
traditional views the preamble to the Act gave warnings against
methods used for evading usury, in particular the commonly used
device of fictitiously selling goods at a given price and buying them
back at a higher price. This device need not, and quite often did not,
involve the actual transfer of goods, but was simply a paper agreement
or even a verbal understanding. By openly allowing payment for credit,
so long as the rate charged did not exceed 10 per cent per annum, most
genuine commercial interest transactions were now allowable.
Naturally traditionalists were up in arms and managed to get the Act
repealed in 1552. The new Act attempted to restore the old position,
and repeated the condemnation of usury as 'a vice most odious and
detestable, as in dyvers places of the Hollie Scripture it is evident to be
seen'. This Act had no chance of long-term acceptance, though it did
remain on the Statute Book for two decades, a tribute to the continuing
strength of the opposition. Eventually in 1571 the regressive Act was in
its turn repealed and replaced by the permissive Act of 1545, with the
same maximum rate of 10 per cent, though this latter Act specifically
excepted the Orphans' Fund of London from being lent out at interest,
this detail again illustrating that the important protective, social aspects
of usury had not been overlooked.
An ingenious solution to the problem of how to devise a scheme
which would continue to give protection to the poor and yet allow
greater freedom for commercial lending was proposed by Francis Bacon
THE EXPANSION OF TRADE AND FINANCE, 1485-1640
223
(1561-1626), who lived through these changes. In his essay 'Of Usury'
he advocated a two-tier rate of interest. First there should be a low
maximum rate for lending the small amounts of money normally
required by the poor. For this social purpose the rate, Bacon suggested,
should be no higher than 5 per cent. However, because 'it is certain that
the greatest part of trade is driven by young merchants upon borrowing
at interest', there should be a second, higher, maximum rate of interest
so as to allow full rein to such entrepreneurial drive. The maximum
commercial rate, claimed Bacon, should be set at 9 per cent. However,
there was to be no free-for-all. Only registered moneylenders properly
licensed would be permitted to operate at these higher rates, and then
only in London and a number of other main cities. Although his vision
of socially and regionally differentiated interest rates was not
implemented, nevertheless his idea that attempts should be made to
bring down the maximum level found considerable support in the early
decades of the seventeenth century, notably from Sir Thomas
Culpepper who published his 'Tract Against the High Rate of Interest'
in 1621. He 'devoted his life to the task of getting Parliament to lower
the maximum rate' (Cunningham 1938, II, 384). As the result of such
pressures a new, lower maximum rate of 8 per cent was established in
the legislation of 1624, which in deference to traditional opinion (but by
that time surely seen as lip-service), was entitled An Act Against
Usury'.
Thereafter the way ahead was clear and an essential series of steps
had been taken to remove the worst aspects of the ban on interest,
without which the indigenous developments in banking which were to
come to fruition in the second half of the seventeenth century would
have been thwarted. Professor Lipson summarized the situation thus:
'The use of borrowed capital on a considerable scale was made possible
by the abandonment of the medieval attitude towards the "damnable
sin of usury." The legal toleration of interest marked a revolutionary
change in public opinion and gave a clear indication of the divorce of
ethics from economics under the pressure of an expanding economic
system' (1956, II, xx-xxi). Whereas discussions about the appropriate
rate of interest had always closely involved moral factors (and in a sense
still do), the other burning contemporary topic, more easily divorced
from ethics, but certainly not from politics, was the relationship
between the supply of money and the level of prices.
Bullionism and the quantity theory of money
Because variations in the flow of precious metals played such an
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THE EXPANSION OF TRADE AND FINANCE, 1485-1640
important role in international trade and the foreign exchanges, it
should occasion no surprise that the foremost theoretical developments
of the period came to be known in England by the term 'bullionism'.
What money is to 'monetarism', so bullion was to bullionism, its
theoretical great-grandparent. The bullionist approach to economic
thought first came to full flower in the age of the Tudors and early
Stuarts. Subsequently it has shown itself very prominently in later
centuries, particularly in the Bullion Report of 1810 and the equally
famous discussions of the Currency School which led up to the 1844
Bank Charter Act, which itself provided the basic constitution for
British currency until 1914, and briefly again for the six years from 1925
to 1931. The narrower view of money as being based on the precious
metals (whether gold or silver or both), stems directly from the
bullionist doctrines of the sixteenth and seventeenth centuries, and
although occasional references to such beliefs can be traced to earlier
times, it was not until this later period, when a veritable spate of
publications appeared on the subject, that anything worthy of being
deemed economic doctrine emerged, and even then was subject to the
conflicting views that commonly accompany most economic theories
when these are closely related to current policies.
Basically, bullionism was the belief that trade, financial and fiscal
policies should be so co-ordinated as to attract into the country the
largest possible supply of bullion, and conversely to minimize those
factors which, if not checked, would lead to a drain of bullion away
from the country. This was not because of any naive, miserly or
particularly misguided adulation of the precious metals themselves, but
because in the circumstances of the time, an adequate supply of such
metals was believed to be absolutely essential for a number of powerful
reasons. Among these were the need for a plentiful supply of sound
coinage, rather than the debased coinage resorted to when bullion was
scarce; the need to prevent a fall (or a low valuation) of sterling in the
foreign exchanges; the need to give profitable employment for British
capital and British workmen, rather than to stimulate foreign
production and employment; the need to provide a ready reserve of
precious metals so as to make it unnecessary for the monarch to have to
rely on an illiquid, impoverished country or a recalcitrant Parliament
for the special taxes required for defence purposes, and so on.
Symptoms, causes, effects and irrelevancies were inevitably mixed up in
many presentations of the bullionist case, though perhaps the extent of
the confusion and irrelevancy may have been exaggerated by Adam
Smith and still more by a number of other, later observers. The
fundamental belief was simply that a plentiful supply of bullion was
THE EXPANSION OF TRADE AND FINANCE, 1485-1640
225
believed to be a prerequisite not only for economic growth but also, to a
country perilously threatened by powerful enemies, for economic and
political independence. Furthermore, given the fact that, despite all the
efforts of monarchs and merchants to find any worthwhile amount of
gold or silver within Britain, the only source of such vitally essential
products was overseas, either by the dubious occasional means of war
and piracy or by the apparently more certain and continuous means of
trade. British bullionists therefore concentrated their attention on
foreign trade and the foreign exchanges. Malynes, Milles, Mun and the
whole army of bullionist pamphleteers would have heartily applauded
von Clausewitz's conclusion regarding the essential similarity of
objectives in war and peace; only the means differed. Unable to rely on
a repetition of Drake's successful piracy, the bullionists had to content
themselves with favourable balances of trade.
Differences between contemporary and subsequent definitions of
'bullionism' and 'mercantilism' loom large in the works of some
historians but are minimized by others. The differences can be seen as
both semantic and as a matter of substance. Contemporary English
writers favoured the term 'bullionism' whereas continental writers
preferred to refer to the 'commercial' or 'mercantilist system', a
nomenclature adopted by Adam Smith. The matter of substance stems
from the fact that bullionism tended to be given a narrow meaning as
being especially concerned with international flows of specie resulting
from particular trades, whereas mercantilism took a wider, more
macro-economic standpoint, looking at the flow of specie resulting
from the aggregate balance of trade and payments. Logically there were
three stages in the supposed transition from bullionism to mercantilism:
first, the balance of individual bargains or particular trades; secondly
the bilateral balance between the home country and another; and
thirdly the aggregate balance. Professor Viner notes, with some asperity
as well as surprise, that the actual chronological development of the
theory of international trade conspicuously failed to follow this logical
arrangement. 'In some of the modern literature on mercantilism,' he
complained, 'there is to be found an exposition of the evolution of the
balance-of-trade doctrine in terms of three chronological stages . . .
This is all the product of vivid imagination' (Viner 1937, 11). Professor
Viner need not have been either surprised or angered, for yet again this
is a most useful illustration of how in the imperfectly linked
development of economic theory and practice, particularly where
money is concerned, the logical and the chronological do not always
march in step, even when nevertheless, they may be heading in roughly
the same direction.
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THE EXPANSION OF TRADE AND FINANCE, 1485-1640
In pleasing contrast, Professor Eli Heckscher adopted a much more
relaxed approach, barely mentioning bullionism as a separate topic, but
including it simply as part of the general development of mercantilist
theory. In his authoritative study, Mercantilism, he most conveniently
and sensibly adopts the line that 'Everybody must be free to give the
term mercantilism the meaning and more particularly the scope that
best harmonise with the special task he assigns himself (Heckscher
1955, I, 2). He then goes on to define mercantilism as a phase in the
history of economic policy occurring between the Middle Ages and the
age of laissez-faire in which the state was both the subject and the
object of economic policy. 'Ideas on the balance of trade and the
significance of money undoubtedly occupy a central position in
mercantilism' (I, 26). Mercantilism was not only a practical policy by
which the state attempted to increase its power and the wealth of its
citizens but also 'there can be no doubt at all that mercantilist
discussion was of importance to the final rise of economic science in the
eighteenth century' (I, 28). If there is a dividing line, necessarily
arbitrary and smudged, between early continental mercantilist doctrine
(equivalent to English bullionism) and the later fully-fledged theory, this
is to be found when the arguments of those based on the overall balance
of trade prevailed over those concerned simply with particular
balances. In England this transition began around 1620 and was almost
completed by 1663 when the age-old prohibition of the export of
bullion and of foreign coin was removed. But of course not all writers,
as Viner overemphasizes, kept to this neat logical divide, for some quite
advanced mercantilist views appeared before 1620, while many
apparently crude and narrow-minded bullionist views appeared long
after 1663. These latter views should not, however, necessarily be taken
as evidence of bullionist back-sliding. Just as in our modern age, ever
since the 1960s the general requirement of nationalized industries to
'break even' had to be supported by stricter, narrower, particularized
targets, and in the 1980s the general attempt to reduce the public sector
borrowing requirement had to be reinforced by insisting on particular
cash limits for each government department, in exactly the same way
the mercantilist target of a favourable balance of trade had to be
supported then by strict limits on those particular items of trade where
laxity had led to substantial leakages of bullion.
The first written evidence in England of a mercantilist viewpoint
regarding the net flow of specie through foreign exchanges appeared as
early as 1381, three centuries ahead of its time, when Richard Aylesbury
argued that a legal ban on the export of bullion was unnecessary
provided that total commodity exports at least balanced imports.
THE EXPANSION OF TRADE AND FINANCE, 1485-1640
227
Similarly he argued that a legal ban would fail if exports exceeded
imports. This not quite isolated but premature insight was, however,
subsequently overlooked and forgotten in the rise of the main body of
bullionist opinion in England, such as that of Hales, Malynes,
Misselden and the Muns, father and son. Of critical importance as a
link between the problems of debasement, the enclosures, inflation and
the foreign exchanges was A Discourse on the Common Weal of this
Realm of England, written in 1549, after the start of the Great
Debasement and before the recoinage, the latter of which it strongly
recommended. Thanks to the patient researches of Miss Elizabeth
Lamond we now know the author to be John Hales MP, a
Commissioner on Enclosures for the Midlands region. Woven into the
Discourse are all the basic concepts which later bullionists were to
develop.
Perhaps the bullionist viewpoint in its simplest, strictest and most
dogmatic form was that put forward by Gerhard de Malynes, son of an
English mint-master who, having emigrated to Antwerp, returned to
England to assist in the Elizabethan recoinage. Malynes wished for
stricter controls on the foreign exchanges, advocated the return of the
office of the Royal Exchequer to oversee such exchanges, since
'exchange is the Rudder of the Ship of Traffic'. Trade should be
monopolistically controlled, excessive imports discouraged and the
exchange rate kept as high as possible. 'Throughout his active life,
Malynes was constantly concerned with monetary questions and in
1609 was appointed a commissioner of mint affairs' (E. A. J. Johnson
1965, 43). The 'Harington' private monopoly of minting farthings
which, as we have seen, was bought by the Duke of Lennox, was
eventually purchased by Malynes - who made a loss on the deal. His
ideas, as shown particularly in his main publication, The Canker of
England's Commonwealth (1601), were similarly unsuccessful, in being
rather too dogmatic even for other bullionists like Misselden and Mun
to accept without violent verbal rejoinders.
The most celebrated of the arguments between Malynes, Misselden
and Mun and their disciples concerned two important related matters,
first the particular practical problem of whether to cancel or to allow
the continued existence of the East India Company, and secondly the
general validity of the balance of trade theory. Malynes was bitterly
opposed to the company, Misselden first opposed but later supported
the company, while Mun, after a very brief initial period of questioning,
became even more firmly a convinced East India man. Edward
Misselden, a member and later deputy governor of the Merchant
Adventurers, was appointed to the royal commission of 1621 to
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THE EXPANSION OF TRADE AND FINANCE, 1485-1640
investigate the trade depression, and in the same year published his
initial views in his pamphlet Free trade or the Means to make Trade
Flourish. In this he agreed with those who opposed the loss of bullion
by traders like the East India Company, in contrast with the long
history of the success of Merchant Adventurers in bringing gold and
silver in to Britain. Within the short space of two years, during which he
began part-employment with the East India Company, he published
The Circle of Commerce or the Balance of Trade in 1623, completely
reversing his previous view, and justifying his position by reference to
the new theory, as the title suggests, of the balance of trade.
This was, according to Professor Viner's researches, the first time
that the term 'balance of trade' had appeared in print, 'borrowed from
the current terminology of book-keeping from the Italians about 1600'
(1937, 9). As modern economists would describe it, the new micro-
economic concept of balancing the books of an individual company
was now transferred to the macro-economics of the state, a most timely
and influential development which enabled the bullionists to judge the
'profit' or 'gain' from trade as a whole by means of its net acquisition of
bullion. The first such computation for England had already been made
jointly in 1615 by Sir Lionell Cranfield and a Mr Wolstenholme and
was referred to by Sir Francis Bacon in an essay of 1616 (though not
published until 1661). Thomas Mun, grandson of the Provost of
Moneyers at the Royal Mint, became a member of the East India
Company in 1615, and in 1621 published his first crude defence of the
company, A Discourse of Trade from England into the East Indies.
However, parliamentary criticism of the company, based on earlier
bullionist theories, continued to threaten the East India trade, so much
so that the company appealed to Parliament in 1628 in a famous and
influential 'Petition and Remonstrance of the Governor and Company
of Merchants of London trading to the East Indies'. This was largely
written by Edmund Mun and formed the basis of the brilliant book
published posthumously in 1664 by his son, Sir John Mun. If a true
valuation were taken of the re-export trade and of numerous other
benefits, the East India trade, he argued 'brings in more treasure than
all the other trades put together' (E. A. J. Johnson 1965, 75).
Despite Mun's defence, attacks on the particular, adverse balances
with India continued throughout the seventeenth century, and with
France for much of the eighteenth. Nevertheless the mercantilist point
of view, based on the overall balance of trade, was clearly winning the
battle, both in theory and in practice, by about 1640. Where, however,
neither the older bullionist nor the new mercantilist arguments could
ever convincingly win the day was with regard to the ability of England
THE EXPANSION OF TRADE AND FINANCE, 1485-1640
229
(or any other country) to achieve through trade policy a permanent net
inflow of specie. The question of what, in those circumstances, would
happen to domestic prices relative to those abroad, and therefore to
trade flows and the rates of exchange, brings us on to an examination of
contemporary developments in the quantity theory of money.
The quantity theory in its fundamentals is the oldest, most simple
and obvious of all monetary theories. Whether a particular society
considers its money to be a special kind of commodity or not, money in
actual fact, like all other commodities, obeys the universal economic
law in that its unit value varies inversely with the total quantity. If we
add, as we all must, 'other things being equal', as, for example, that
reductions in quality may permit commensurate increases in quantity,
we are of course simply relating the universal law to the particular
circumstances of the time and place in question. During periods of
monetary stability the general public does not bother about monetary
theory and the theorists lie dormant. It is generally only during periods
of substantial financial changes that interest is aroused as to the true
nature and causes of such events. The usual result is to produce some
up-to-date variation of the quantity theory appropriate to the
particular circumstances obtaining at the time. The quantity theory has
been the most popular of the general theories of money because it is
almost infinitely adaptable. With the exception of Keynesian-type
challenges, it has been almost all things to all men. Its ability to find
renewed popular acceptance depends, however, on the age-old stock
phrases being recoined form time to time. Friedmanism is just a modern
example of a long line going back beyond Aristotle; for as we saw in
chapter 3, it was the world's first substantial currency debasement, in
Athens in 405 BC, that gave rise to the first recorded reference, by
Aristophanes, to 'Gresham's Law'. It should therefore occasion no
surprise that the first substantial treatment of the quantity theory to
appear in western Europe was directly concerned with the need to re-
establish monetary stability following a period of particularly severe
monetary debasement.
The European roots of the quantity theory of money lead back to
Nicole Oresme (1320-82). Since Oresme was undoubtedly the greatest
economic thinker of the Middle Ages, concerned especially with
monetary theory and policy, and because he had a very considerable
influence on later writers, his contribution deserves at least some brief
comment. Oresme was born near Caen around 1320, and in 1370 he
was made chaplain and adviser to King Charles V (1364-80) and
promoted to bishop of Lisieux in 1377. At the request of Charles, aptly
known as 'the Wise', Oresme translated Aristotle's Economics, Ethics
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THE EXPANSION OF TRADE AND FINANCE, 1485-1640
and Politics. Aristotle's influence and that of a large number of
subsequent writers on economic matters, including Oresme's teacher at
the University of Paris, Jean Buridan, are clearly to be seen in Oresme's
own writings. In glaring contrast to the contemporary stability of the
pound sterling, French currency had become the money box of its
monarchs, manipulated at their pleasure. Between 1295 and 1305, the
value of French currency was reduced by no less than 80 per cent, and in
the next decade brought back up to its original value, only to fall back
again during the reign of Charles IV (1322-8). He was known as the
Fair - a reference to his appearance, not character: among his monetary
misdemeanours was his confiscation of the property which the
Lombard bankers held in France. Oresme's writings need therefore to
be assessed against this background of volatile and arbitrary changes in
the value of money which had been so violent that they threatened to
destroy the monetary system. The first edition of Oresme's book,
entitled De Origine Natura Jure, et Mutationibus Monetarum and
consisting of twenty-three chapters, appeared in 1355, followed by an
enlarged edition of twenty-six chapters in 1358. The first printed
version appeared in 1477. Oresme's work represents a watershed in the
development of economics, for his treatise 'was the first independent
monograph on the subject ... a comprehensive and well-built synthesis
which must be regarded as one of the main landmarks in early
economics literature' (Sarton 1948, II, 1, 494).
Oresme deplored debasement and insisted on maintaining the
quality and therefore the stability of the monetary medium. Although
he owed his office directly to the king he was no mere placid placeman.
He insisted that the king was not the owner but rather the custodian of
the currency with a duty on behalf of the public to maintain its value.
Although Oresme was perfectly aware of the use of credit and in
particular of bills of exchange, he saw money as being based absolutely
on the intrinsic value of the metal and went into considerable detail on
how best to arrange mint prices, exchange rates and the ratios of gold
to silver and to other alloys in order to show what was necessary in
practice to achieve the desired degree of stability. As a mathematician
and physicist, his practical approach commanded respect, for he was an
all-rounder, good with his hands, his head and his heart. His emphasis
on the priority of maintaining the value of money and on his view as to
what we would call the narrowness of the money base, show him to be
the first bullionist and indeed in a sense the first monetarist.
The next important statement of the quantity theory came from an
unexpected source, from someone whose genius in astronomy has
perhaps blinded us to appreciation of his more mundane contributions
THE EXPANSION OF TRADE AND FINANCE, 1485-1640
231
to the ordinary business of life. Nicholas Copernicus (1473-1543) first
became interested in the theory of money because, like Oresme, he was
forced to suffer from successive debasements which were then occurring
in a number of Polish provinces as throughout Europe, a problem made
all the worse with their many local currencies and even more numerous
systems of weights and measures. As a result of his studies he produced
his Treatise on Debasement in 1526 (though this was not published in
printed form until the Warsaw edition of 1816). In his treatise, though
strongly condemning debasement, he nevertheless argued that it was
the total amount of currency, as indicated by the total number of coins
in circulation rather than the total weight of metal they contained that
really determined the level of prices and the buying power of the
currency. He grasped the essential fact that, for the great majority of
everyday, internal transactions, coins had already become simply
tokens of value. It was their number, not their intrinsic metallic
content, their quantity rather than their quality, that fundamentally
determined their true value. It was the duty of the princes therefore to
limit total circulation, and the avoidance of debasement was seen as the
best practical method of avoiding an excess issue of coinage and
therefore of avoiding the gross instability of prices and of exchanges.
Although, given the much more detailed treatment produced by
Oresme, Copernicus can no longer be said to have made the first
statement of the quantity theory (as some claim), nevertheless the
emphasis which he placed on variations in quantity and not simply on
quality at least justify his position as one of the important pioneers in
the development of monetary theory before the influx of American
silver rose to such a level as to make such ideas more easily and
commonly appreciated.
Next in time, and again spurred on to his conclusions by the unusual
spectacle of English debasement on the continental scale, came the
Discourse of Hales, already described. In this connection, however, the
common view, given by E. A. J. Johnson, among others, stands in need
of correction. Johnson wrongly states, As every student of economic
history knows, Hales gave the wrong explanation for the rise of prices'
and 'Hales erred in assigning the cause of the rise in prices to
debasement' (1965, 37). As Dr Challis in particular has shown,
debasement in England was in fact the most important single cause of
the high rate of inflation occurring during the decade when Hales
wrote. Hales was right, and should not be blamed for failing to take
into account the influx of American silver which did not enter England
in any substantial amount until much later. Jean Bodin's Reply to
Malestroit (1568) is rightly regarded as a milestone in the development
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THE EXPANSION OF TRADE AND FINANCE, 1485-1640
of the quantity theory of money, although it again needs to be pointed
out that while Bodin was the most influential contemporary writer to
underline the role of New World specie as the main cause of inflation he
was no crude bullionist. While he was clear that 'it is the abundance of
gold and silver that causes, in part, the dearness of things', he also
showed that other 'real' or non-monetary causes were at work such as
'the increase in trading activity, the rise in population and agricultural
expansion' (Vilar 1976, 60-91). Bodin also related very carefully some of
the main regional and temporal differences in inflation to the pattern of
geographical dispersal of Spanish specie - first in Peru itself, then in
Andalusia, then to the rest of Spain, then to Italy, France, Germany, the
Low Countries etc. as waves going from the monetary centre to the
periphery.
By the beginning of the seventeenth century therefore it was
becoming clear to practically all writers on money (and they were
many), whether they might be considered bullionists or mercantilists,
that a persistent influx of precious metals would bring with it serious
inflationary consequences. The decline of Spain was already becoming
obvious. Nevertheless, the main body of bullionist/mercantilist opinion
in England, while not being unaware of the difficulties, seemed to be of
the general opinion that the Spanish disease could in fact be avoided.
England was at the periphery and therefore just 'catching up' on her
share of wealth from the rest of the world and especially from her
European competitors. It was also emphasized that so long as England
expanded her economy, developed her exports, encouraged the
expansion of her merchant marine, and so on, the influx of precious
metals would be put to good use rather than wasted in inflationary
excesses. This vital necessity of expanding production by the proper
investment of favourable balances was clearly emphasized by Malynes
in his Canker of England's Commonwealth: 'The more ready money,
either in specie or by exchange, that our merchants should make, the
more employment would they make upon our home commodity,
advancing the price thereof, which price would augment the quantity by
setting more people on work.' As Heckscher (from whom Malynes's
quotation is taken) points out, 'This was perhaps the first time that the
claim that rising prices increase employment was ever clearly expressed'
(1955,11,227-8).
By giving the quantity theory of money this dynamic, Keynesian
twist, the mercantilists were able to postpone the day of reckoning until
1776, when Adam Smith destroyed them in theory and the revolting
American colonies in practice. But before that fateful date, bullionism
merging into mercantilism enjoyed some two centuries or more of
THE EXPANSION OF TRADE AND FINANCE, 1485-1640
233
predominance as an economic theory based very largely upon a
realization of the power of money as a liquid, macro-economic
resource. It would be very wrong, however, to allow the brilliance of
either Adam Smith or Thomas Jefferson to blind us to the positive
achievements of mercantilism. It was during that period that the
economic centre of gravity moved from the Mediterranean to north-
west Europe in general and Britain in particular. It was during the latter
part of that same period that British banking finally emerged to fame
and fortune. But in 1640 that could not have been readily foreseen.
Banking still foreign to Britain?
Perhaps the single most important sign that England was determined to
develop her own financial institutions rather than rely on foreign banks
was the building of the Royal Exchange in 1566. This was the
inspiration of Sir Thomas Gresham (1519-79) and it received the royal
seal of approval when it was officially opened by Elizabeth I in the
following year. Yet it is significant that not only the very concept of the
'Bourse', which was its first name, was imported, but that the building
itself was designed by a Flemish architect, that the skilled craftsmanship
was supplied by Flemish carpenters and masons, and that even the bulk
of the building materials such as the stone and glasswork were
imported. The most highly skilled workmen and the most highly skilled
operators on the foreign exchange market (with the outstanding
exception of Gresham himself) were at first foreigners, especially
Italians, Germans and increasingly the Dutch. Gresham had learned his
skill mainly in Antwerp where he lived, on and off, for twenty-three
years between 1551 and 1574, operating both on his own account and as
royal agent. There he learned the art of large-scale lending and borrow-
ing as well as foreign exchange so thoroughly that he frequently
out-performed his foreign tutors. A famous instance of England's
growing financial expertise was demonstrated in 1587 when Sir Francis
Walsingham arranged with a number of other operators to 'corner' so
many bills drawn on Genoan banks that the build-up of the resources
necessary to equip Philips IPs Great Armada was delayed. Whether this
was the main reason why his fleet failed to sail against England until the
'summer' of 1588 is doubtful, but it was at least a substantial contribu-
tory reason for the delay and illustrates how sophisticated the financial
aspects of economic warfare had become by the 1580s. An interesting
example of Gresham's many-sided financial genius was his proposal to
set aside a fund of £10,000 to be used to counter adverse fluctuations in
the exchange rates, a sixteenth-century equivalent of the Exchange
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THE EXPANSION OF TRADE AND FINANCE, 1485-1640
Equalization Account of the 1930s. Although this scheme failed, mainly
because Elizabeth thought it too extravagant, it again indicates the
affinity for finance that enabled him to amass the largest fortune of any
contemporary commoner in England.
It is significant too that such examples of advanced financial
development were concerned particularly with foreign exchange, where
England was the eager pupil still lagging behind her European masters.
As we have seen, a much wider range of banking expertise had long
been developing on the Continent, where the gradual decline of the
periodical meetings of medieval fairs had led to the more permanent
provision of everyday banking facilities, including not only the issue of
bills of exchange and foreign exchange facilities but also regular deposit
banking and loan facilities for ordinary business as well as for rich
merchants, princes, municipalities and state governments. The Bank of
Barcelona had been founded as early as 1401; the Bank of St George,
Genoa, in 1407, followed in 1585 by the public Bank of Genoa, which
later occupied a strategic role in European finance; the Banco di Rialto
in Venice followed shortly after in 1587. These are just a few examples
of a mushroom growth of continental (especially Italian at first and
later Dutch) banks, all the more important because they had numerous
branches or agents in most of the main financial centres of Europe,
including London. The financial and political power of the Bank of
Genoa is illustrated by Andreades's description that it carried on 'a
business very similar to that of modern banks' acting as 'a state within
a state . . . The East India Company never held in England a position a
quarter as great' (Andreades 1966, 79). A significant pointer to the
northern movement of Europe's financial centre of gravity was the
dominance of Antwerp during most of the sixteenth century. The
Tudors borrowed considerable sums from time to time from the Low
Countries, including as we have seen, the loan of £75,000 to assist
Elizabeth's recoinage. As Antwerp declined, so the leading financial
role was taken up by the public Bank of Amsterdam, known also as the
'Wissel' or 'Exchange Bank', founded in 1609; but part of Antwerp's
loss was also eagerly taken up by London.
One of the most important and pervasive foreign influences which
increasingly modified English business methods at this time was the
introduction of 'Italian' double-entry bookkeeping. We have already
seen how the idea of a balance between income and expenditure was
transferred to the national accounts to support mercantilist views
regarding the balance of payments. As in Italy, among the first to use
the new methods in England were those merchants whose activities
commonly included foreign exchange. Gradually, however, the new
THE EXPANSION OF TRADE AND FINANCE, 1485-1640
235
custom spread throughout most business, except that the Exchequer
itself was slow in adopting double-entry. Foreigners resident in London
were by their example our first tutors and 'the ledger of the Borromeo
Company of London, covering the years 1436—9 is an example of an
advanced technique that was adopted by English merchants only a
century later' (Ramsay 1956, 185). Among the earliest examples of
double-entry by an indigenous merchant, are the accounts of Thomas
Howell covering the six years 1522—7. As well as the Italians, the
Spaniards, French, Germans and Dutch had long been familiar with the
new accounting methods before they became widely adopted in
England, a development which had to await publication of translations
of the standard Italian works on the subject.
Although the origins of double-entry bookkeeping appear to be
uncertain, the system had been in operation for well over a century
before the first Italian book on the subject was printed and published in
Venice in 1494. This was the famous Summa de Arithmetica,
Geometrica, Proportioni et Proportionalita, written by Friar Luca
Pacioli, a mathematician and close friend of Leonardo da Vinci. His
book consisted of five sections: 'On Arithmetic and Algebra'; 'Their
Use in Trade Reckoning'; 'Bookkeeping'; 'Money and Exchange'; and
'Pure and Applied Geometry'. His work created an immediately
favourable impression, and in 1496 Pacioli was appointed professor of
mathematics at Milan. The popularity of the bookkeeping section of
his Summa led to its being published separately as The Perfect School
of Merchants in 1504. The new form of bookkeeping gave a further
stimulus to the wider use of Arabic numerals. The first, but not
particularly influential, translation of Pacioli's ideas to appear in
English, was published by Hugh Oldcastle in 1543. Far more influential,
however, was James Peele's The Manner and Form How to Keep a
Perfect Reckoning, published in London in 1553.
Exactly how important the new accounting methods were to such
broad matters as the pace of, and indeed, the very nature of, economic
growth in Europe, remains a matter of dispute. Some see double-entry
simply as a useful technical device of barely more than marginal
importance to economic development as a whole, while others, notably
Werner Sombart, have seen the new accounting methods as being of
fundamental importance to the development of modern capitalism.
Thus Sombart claimed that 'Capitalism without double-entry book-
keeping is simply inconceivable . . . With this way of thinking the
concept of capital is first created' (Sombart 1924, II, 110). A modern
expert views the contribution of accountancy much less dramatically as
not having 'the far-reaching consequences attributed to it by Sombart',
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THE EXPANSION OF TRADE AND FINANCE, 1485-1640
but rather possessing merely 'modest practical utility' (Yamey 1982,
chapter 2, p.21). In itself such an innovation in accountancy may well
not amount to very much. However, taken in conjunction with all the
other contemporary pressures on businessmen, double-entry may well
have been a catalyst in the development of more capitalistic attitudes.
The truth probably lies somewhat nearer the German exaggeration of
Werner Sombart than the typical English understatement of Professor
Yamey.
The Royal Exchange was far from being the only example of the
important role played by the importation of skilled labour. Foreign
labour and capital combined to raise the rate of economic growth above
that of Britain's European neighbours, with the result that the gap
between their standards of productive efficiency in agriculture and
industry and therefore of average standards of living, was narrowed in
favour of Britain. Professor Nef has shown, in his essay on 'The
Progress of Technology and the Growth of Large-Scale Industry in
Great Britain, 1540-1640' that foreign labour and capital helped both
to transform existing industry and to introduce a range of new
industries into Britain in this period, so reducing Britain's import-
dependence and expanding her exports. By the end of this period,
Britain was beginning to overtake her neighbours in certain areas.
While the progress of large-scale industry in mining and metallurgy from
1540 to 1640 was stimulated by the application of technical processes
introduced with the help of foreign artisans, it is probable that before the
middle of the seventeenth century these processes were being more
extensively used than in foreign nations. (Nef 1954, 98)
Similarly in agriculture the draining of the Fens was financed jointly by
Dutch and English capital (including £100,000 supplied by the Duke of
Bedford), under the experienced leadership of the Dutch engineer
Cornelius Vermuyden with a core of skilled Dutch workmen. The scale
of business, whether commercial, agricultural or industrial, was
becoming greatly enlarged beyond the financial resources of
individuals. The era of joint-stock enterprise was emerging, and with it
the need for new, stronger financial intermediaries. The rise of these
new financial institutions was integrally associated therefore with the
increase in the scale of agricultural and industrial enterprise.
It is significant that the first of such joint-stock companies, the
Russia Company of 1553, arose out of a search for the North-East
Passage, and that German metalworkers were prominent in the
development of the first of two inland joint-stock companies, the Mines
Royal and the Mineral and Battery, both formed by Royal Charter in
THE EXPANSION OF TRADE AND FINANCE, 1485-1640
237
1568. Among the founding stock of the Levant Company of 1581 was a
large sum of £40,000 contributed by Elizabeth I as part of her proceeds
from Drake's profitable circumnavigation. Foreign capital in one way or
another found its way into most of these joint-stock companies,
including the most famous of all such ventures, the East India
Company, founded in 1600. The Royal Exchange was for many years
more of a club for merchants engaged in overseas trade than simply a
foreign exchange market. One of the main reasons for the net inflow of
foreign investment into Britain was the fact that interest rates offered in
Britain were considerably higher than those in Holland, and London
remained a powerful magnet for overseas investors throughout this
period. Nevertheless, though London was especially attractive for
capital, it was no longer necessary for foreigners to be given special
privileges in conducting foreign trade, and as a sign of this, the
Steelyard, the London headquarters of the Hanseatic League, was
closed down in 1597. Although Dutch influence, supplemented by that
of the French Huguenots, continued to play a strong role in financial
circles in London throughout the seventeenth century, that of the
Italians and Germans declined, particularly from the onset of the
Thirty Years War in 1618. By 1640 the foreigners who had helped to
build and operate the Royal Exchange were no longer the dominant
partners. Thus although 'banking' in the strict sense of the term was
still largely foreign to Britain at the beginning of the seventeenth
century, it had become much less so by around 1640. The financial
apprentice was about to set up his own unmistakable brand of banking
business.
6
The Birth and Early Growth of British
Banking, 1640-1789
Bank money supply first begins to exceed coinage
Many of the most important aspects of modern banking emerged in
Britain in the century or so after 1640, during which the forces of
constitutional, agricultural and commercial revolution intermingled to
prepare the way for the world's first industrial revolution. From being
simply an industrial and financial apprentice of continental Europe,
particularly Holland, Britain had by the end of the period clearly
established a position of international leadership. The expansion of
private debt and credit channelled mainly through London by new
groups of financial intermediaries using new forms of notes, bills and
cheques; the crucial change in government debt from a royal, personal
obligation to the higher status of a national debt; the growth of
overseas trade more commonly financed by bills drawn on London, and
the modification of this system in order to finance the growth of
domestic trade and production financed by internal bills; the growth of
taxation made more viable through more efficient 'farming'; the
increased importance of marine insurance, life assurance and, after the
Great Fire of London, of fire insurance; the growing popularity of state
lotteries and annuities; the growth in the business of the stock exchange
and foreign exchanges - all the above were just some of the more
significant among a whole host of changes which together stimulated
the development of specialized financial institutions. Among these the
goldsmith bankers were eventually to triumph over their early rivals
such as the scriveners, brokers and merchants. By the end of the
seventeenth century the popular clamour for a public bank to compare
with those of Italy, Sweden and especially Holland, and to compete
THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
239
with the private goldsmith bankers so as to bring cheaper money to
Britain, culminated in the establishment of the Bank of England in 1694
and the Bank of Scotland a year later.
These exciting entrepreneurial initiatives had by the end of the
seventeenth century led to the position where the supply of bank credit
in Britain was an essential and growing supplement to the stock of
coins, so that by the time Adam Smith's Wealth of Nations was
published in 1776, bank money clearly exceeded metallic money, a
milestone in world monetary history. The important macro-economic
results that would stem from supplementing coins with bank paper
were remarkably well foreseen by a number of mid-seventeenth-century
writers, most clearly of all by Sir William Petty (1623-87), a veritable
polymath, professor of anatomy at Oxford, musician, inventor, founder
member of the Royal Society and a most percipient political economist.
In his Quantulumcunque concerning Money (1682) he stated
prophetically, 'We must erect a Bank, which well computed, doth
almost double the Effect of our coined Money', adding with some
pardonable exaggeration that 'We have in England Materials for a Bank
which shall furnish Stock enough to drive the Trade of the whole
Commercial World.'
Nevertheless, important as the new banks were for the merchants,
lawyers, goldsmiths and for the government, (their most important
customer), coins and tokens remained the only currency handled by the
vast majority of the population. Velocity of circulation varied usually as
it still does inversely with the value of the transaction, with the small
silver and copper coins changing hands in the ordinary daily business of
life far more frequently than either gold or the ownership of the
'Running Cash Accounts' of the goldsmith bankers. In drawing
attention therefore to the undoubted economic significance of the new
sources of generally safe saving and convenient, cheap lending provided
by the banks, we need to remind ourselves of the absolutely
indispensable role played by full-bodied silver and gold coins in the
economic life of the community, a situation that was to remain true, by
and large, right up to 1914. The new forms of bank money brought
a liberating, timely and essential extension to overcome the
debilitating constraints of the metallic money supply, and in addition
the bankers offered a range of new financial services beyond the ken of
the Royal Mint. All the same, the healthy development of the banks
themselves was crucially dependent upon the foundation of a sound
and sufficient supply of the traditional and officially most important
form of money; gold, silver and copper coins. Let us therefore turn now
to consider the main features in the development of the coinage system
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THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
in Britain in the century or so after 1640 with special but not exclusive
reference to its interaction with the birth and growth of British
banking.
From the seizure of the mint to its mechanization, 1640—1672
'Numismatically the reign of Charles I (1625-1642) is one of the most
interesting of all the English monarchs' (Seaby and Purvey 1982, 164).
We noted, in chapter 5, that the 1630 treaty with Spain had guaranteed
Charles abundant supplies of bullion, mostly silver, so enabling him
during his interrupted reign of twenty-four years to produce around £9
million of coins, almost double that issued during Elizabeth's long reign
of forty-five years. The Tower mint in London became so busy that
branch mints were opened, first at Aberystwyth in 1637, and then,
when Charles was forced out of London by the Civil War, he opened a
large number of mints, those at Oxford, Shrewsbury and Bristol being
particularly active. In addition, use was made of mints at Colchester,
Chester, Cork, Edinburgh, Dublin, Exeter, Salisbury, Truro, Weymouth,
Worcester and York. Coinage, of a sort, was also turned out for the
hard-pressed royal cause in the besieged towns of Carlisle, Newark,
Pontefract and Scarborough. Apart from the rather strange pieces
produced by the latter four towns it is important and, given Charles's
character, surprising to note that the quality of this vast new issue was
meticulously maintained.
Charles, habitually short of money, treasured the profits from
minting, and by a royal proclamation in 1627 tried to add to them by
reviving the Crown's ancient monopoly of exchanging and exporting
coin. The king was forced to fume in vain against the growing power of
the goldsmiths who had 'left off their proper trade and turned [into]
exchangers of plate and foreign coins for our English coins, though they
had no right'. Charles was strongly tempted on at least two occasions
to go for the quick, rich profits to be reaped from debasement. His first
attempt, made in 1626 just a year after he came to the throne, failed
largely through the opposition of the Privy Council led by Sir Robert
Cotton. His second vain attempt, in 1640, involved a plan to coin some
£300,000 nominal value shillings but containing only a quarter of silver,
enabling him to pocket the gross profit of £225,000 less the expenses of
the deal. Yet again the opposition of the Council, stirred by a speech by
Sir Thomas Roe — remarkably similar to that of Cotton — proved too
strong, and the purity of the sterling standard was maintained. In the
same year Charles forced the East India Company, to which he was
already in debt, to sell to him on two years' credit its entire stock of
THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
241
pepper, a favourite commodity for speculation at that time. Charles
agreed a purchase price of 2s. Id. per lb and sold the lot immediately for
Is. Sd. per lb for ready money. Thus, although he considerably
increased his medium-term debt, the deal gave him the cash he so
desperately needed, but again at the further cost of alienating the City
merchants.
Thwarted by the Council, by Parliament and by the City of London,
which latter pointedly refused the king's request for a loan of £200,000,
Charles turned to another rash expedient which was to lead to
immediate and long-term results rather different from those he had
anticipated. As from 27 June 1640 he decided to put a stop to the flow
of coin from the mint, taking for himself most of the outflow which
normally went to the merchants and goldsmiths to whom the king was
permanently in debt. On the total amount of between £100,000 and
£130,000 thus locked up in the Tower mint and which in normal
circumstances would have been claimed, as and when coined, by his
creditors, the king proposed to allow 8 per cent. The merchants and
goldsmiths immediately raised such an outcry that Charles partially
relented, allowing two-thirds of the total bullion to be coined and let
out in the usual way, but he still insisted on holding back one-third for
six months, paying his creditors 8 per cent. Thus although this partial
stoppage of the vast flow of issues to which the merchants, goldsmiths
and other creditors of the king had rightly become accustomed might
not be quite accurately described with the confiscatory overtones of the
common description of 'seizing the goldsmiths' deposits', and although
the enforced creditors were eventually paid in full, royal credit had
suffered a cruel blow in a most financially sensitive area. Consequently
that growing body of influential persons desirous of setting up some
form of national or public bank were now more determined than ever to
prevent such an institution from coming directly under the power of the
monarch to use as an extension of his mint, and thus granting him
further independence from the growing power of Parliament over the
royal purse - just another example of how monetary, fiscal and
constitutional matters were inextricably intertwined in the history of
the mid-seventeenth century.
Despite a couple of lapses in intention, Charles had in fact fully
upheld the quality of newly issued money. Indeed during his reign the
mint began to give some attention to the new inventions which were
being more fully applied elsewhere. Although English mints had on the
whole maintained the weights and purity of their gold and silver
coinage at a higher level than on the Continent, they lagged behind in
the technical developments taking place in the mechanization of
242
THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
minting, particularly in France and Flanders. The transformation of
coin-making from the slow laborious hand hammering methods that
had been in basic principle unchanged from the days of ancient Greece
into a more mechanized form, able to produce a faster, cheaper and
more uniform output, much more difficult to counterfeit, was not the
result of a sudden, single invention, but emerged from a long process of
trial and error, made all the longer and more difficult by the furious
opposition of the established moneyers. It took many years of patient
effort to produce horse-powered machines to roll the metal, to cut out
the circular blanks, to stamp the engravings firmer and more quickly
than was possible by hand and, perhaps more important than all else at
that time, to be able to introduce various forms of graining around the
circumference of the coins and to make inscriptions around the edges,
both of these latter devices enabling the facile coin clipper finally to be
outwitted. The fully mechanized or 'milled' coin with its famous milled
edge first reached complete acceptance by 1645 in France when the
hammer was finally banished from the Paris mint, a situation not
achieved in England until after the Restoration.
'It was only with the employment of Eloy Mestrell at the [Tower]
mint during the early years of Elizabeth's reign that mechanization really
got under way', involving experiments with horse-powered machines
for stamping, and in making counter-rotating hand screw machines for
edging devices (Challis 1978, 16). His experiments were not well received.
He was dismissed in 1572 and hanged ignominiously in 1578 for
counterfeiting, the very crime his machines were intended to circumvent.
Later immigrant French and Flemish engineers were to have better
luck. Nicholas Briot, chief engraver at the Paris mint, having become
frustrated by the strong opposition of the traditionalists, was lured to
Britain in 1625 where he produced the first significant issues of milled
silver between 1631 and 1640 both at London and at Edinburgh, though
hammered money still prevailed. With the seizure of the London mint
by the Parliamentarians in August 1642 Briot's influence declined.
During the Commonwealth, 1642-60, practically all the coins struck
were of the old-fashioned hammered variety, fittingly of very plain
design and carrying their inscriptions in English rather than the Latin
still used by the Royalists, which smacked too much of the papacy for
the liking of the Puritans. The Parliamentarians were however very keen
to proceed with the various experiments of the time, and with that in
mind invited Pierre Blondeau, engineer at the Paris mint, over to London
in 1649. Eventually the mint let him produce a small amount of milled
silver, part of a vast treasure captured from a Spanish ship. His meagre
£2,000 worth total of milled coins may be contrasted with the £100,000
THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
243
worth of hammered coins produced from that same treasure in the same
year, 1656, and while Briot's coins were not issued, all the hammered
coins were issued as usual. Disillusioned, Briot left for France, but was
recalled by Charles II a few years later. Meanwhile the Commonwealth
government cancelled the private contracts issued by the Stuart kings
for the production of farthings and halfpence, and since the very small
silver halfpence were issued only sparingly and for the last time by the
Commonwealth, the customary dearth of small coins grew to crisis
proportions. These shortages were partially filled unofficially by a vast
issue by merchants, manufacturers and municipalities, between 1648
and 1672, of copper tokens, mostly of farthings and halfpence.
With the Restoration of Charles II in May 1660 the age of lukewarm
experimentation soon came to an end and vigorous preparations were
made to mechanize minting as fully and as quickly as possible. For the
first two years of his reign it was necessary to continue with the
traditional hammered process and, as a transitional measure until such
time as sufficient of the new regal coins appeared, the 'illegal' coins
issued by the Commonwealth were still accepted. Charles's
determination to press on with the new methods was made plain by an
Order in Council of May 1661 by which 'all coin was to be struck as
soon as possible by machinery, with grained or lettered edges, to stop
clipping, cutting and counterfeiting' (Craig 1953, 157). Blondeau was
immediately recalled from France and given a 21-year contract to
specialize in producing improved forms of milled and engrained edges.
For the major manufacturing processes of blanking, stamping and so
on, a Flemish family of three brothers, John, Joseph and Phillip
Roettier, were appointed to the Tower mint early in 1662. The new team
was quickly put to work and produced in 1663 the new £1 coin that
symbolized the true birth of modern mechanized minting in Britain —
the golden guinea, so called because the gold came from west Africa, its
origin also being indicated by carrying the elephant sign of the Africa
Company (later the elephant and castle). The guinea was aptly edged
with the motto 'Decus et Tutamen' - an Ornament and Safeguard -
believed to have been copied from the clasp securing the purse of
Blondeau's patron, Richelieu. In the same year, 1663, an Act for the
Encouragement of Trade was passed which permitted the free export of
foreign coin or bullion provided only that a declaration was made at the
customs that it was actually of foreign origin, a declaration which many
traders found as easy to make as it was profitable. The expectation was
that free export would equally encourage a plentiful import of bullion,
so necessary for minting and warring, as well as being essential for
trade.
244
THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
In 1666 an Act for the Encouragement of Coinage was passed by
which the age-old seigniorage and other charges traditionally levied on
customers of the mint to pay for coining were abolished. Henceforth
the cost was to be met by import duties on wine, beer, cider, spirits and
vinegar. A much more modern administrative system thus reinforced
the beneficial effects of the technical improvements in the currency. As
well as applying the new methods of minting to the silver and gold
coinage, an important new step was taken in 1672 when the first proper
state issue of a copper coinage appeared from the Tower mint, fully
mechanized and bearing the famous Britannia insignia which has
appeared on British coins in various guises for over 300 years. Britannia,
seated on a bank of money, formed the official seal granted to the Bank
of England in 1694 and still adorns the current fifty pence piece and the
current notes of the Bank. The historian of the mint, Sir John Craig,
seems perhaps too readily to have come to the conclusion that 'there is
no foundation for the statement that the figure, in which the face is
microscopic, was modelled from a lady of the Court' (1953, 174).
However, the evidence given by Ruding in 1819 in his Supplement to his
voluminous Annals of the Coinage still seems to be convincing: 'These
coins were engraved by Roettier and the figure of Britannia is said to
bear a strong resemblance to the Duchess of Richmond, in our coins
and in a Medal, as one might easily and at first sight know it to be her.'
He gives the evidence of contemporaries like Evelyn and Walpole, the
latter believing that 'Roettier, being in love with the fair Mrs Stuart,
Duchess of Richmond, represented her likeness under the form of
Britannia on the Reverse of a large Medal' (Ruding 1840, Supplement,
59). Be that as it may, what is still more certain is that the new milled
Britannia coinage was so attractive that instead of being circulated as
was urgently required, it was initially most avidly hoarded, while the
existing, badly worn, unattractive hammered coins and tokens
continued to be used instead. As a not unimportant rider to Gresham's
Law, bad-looking money chases out the good-looking money. Of course
the new mechanized coins, as well as being attractive to look at, were
appreciably heavier than the old coinage, so that although the clipper
was made redundant, the culler and melter were still thriving. Many of
the new coins, especially the silver coins, disappeared almost as soon as
they were issued. Charles II had successfully revolutionized the
techniques of minting and had introduced a freer administration of the
currency, yet chiefly because most of the newly milled money had
quickly vanished, another great reform of the coinage became
obviously necessary within a few years of his death in 1685.
THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
245
From the great recoinage to the death of Newton, 1696-1727
The main problem lay with the terrible state of the silver coinage, for it
was still the old hammered silver that formed the bulk of the currency.
The gold coins were circulated less frequently than silver (though their
circulation was increasing) and they were handled more carefully than
was the case with the battered and less valuable silver. Furthermore the
gold coins were eagerly sought by the goldsmith bankers for use as
reserves for their deposits. As for minting base metals like copper, this
was considered by the mint at that time and even as late as 1751 to be
simply a very reluctantly accepted social duty. Thus in that year Joseph
Harris, assay master of the mint, considered that 'Copper coins with us
are properly not money, but a kind of tokens' though admittedly 'very
useful in small home traffic' (Craig 1953, 250). Consequently the
recoinage, when it belatedly took place from 1696, was like that of all
previous English examples, a recoinage of silver, still the major
component of the currency. As more and more silver drained away to
Holland and to the Far East the urgent need for reform grew
cumulatively greater. Though, as we have seen, the Stuart kings were
unable to debase the currency in England, James II tried it on in Ireland,
to which country he fled via France, after abdicating in December 1688.
A considerable amount of brass and 'mixed white metal' coinage was
produced by the Dublin mint before James was defeated at the Battle of
the Boyne on 1 July 1690. In the face of the heavy military expenditures
facing the new monarchy of William and Mary, as war with France had
broken out again in 1689, some argued that reform of the coinage
should be deferred until the end of the war when the enormous strains
on the state's finances would be alleviated. Others, including the key
personage of the Chancellor of the Exchequer, Charles Montagu,
argued on the contrary, that the successful prosecution of the war itself
depended crucially on immediately reforming the currency, otherwise
soldiers could not be paid in acceptable coin, nor could the army and
navy secure the supplies they needed. The army marched on its money.
The sharply increasing price of the guinea was an incontrovertible
index of the crisis in the coinage. Though originally issued at 205. it had
risen quickly to 215. or just above until in March 1694 it rose to 225. It
reached a peak of 305. by June 1695. Against such evidence the
procrastinators gave way, and the decision to reform was given by the
king in Parliament in November 1695. Now the arguments, which had
been simmering for years, about what type of reform should be carried
out, remained to be hastily settled. There were two main questions, the
first one being whether to re-establish the old standard of metallic
246
THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
purity, or to reduce it. Given the lessons of monetary history regarding
the previous slippery-slope results of debasement, those in favour of
maintaining the purity won the day. Secondly there was a more even
division of opinion as to whether the weights of the new coins should
also be maintained at the old mint level, obviously at great cost, or
whether they should be brought down somewhere near to the average
weight of the worn and clipped coinage which formed the actual
currency of the day, at a correspondingly lower cost to the Exchequer —
but, it was feared, with loss of face and still more important, loss of
public credit. The various views brought into the arena some of the
foremost members of the Age of Enlightenment, including the
philosopher John Locke and the world's greatest scientist, Isaac
Newton, both of whom had been asked for their views by the
Chancellor of the Exchequer, Charles Montagu. Locke argued strongly,
in his Short Observations and Further Considerations Concerning
Raising the Value of Money, both published in 1695, in favour of full
restoration of the weights. The opposite school was led by William
Lowndes, Secretary of the Treasury, and hence possibly a little
predisposed to save the Treasury the very heavy costs of a full
restoration. Lowndes had made a very thorough study of the history of
the currency and made a number of telling points, widely supported by
the goldsmiths and bankers, for writing down the value of the currency
and stabilizing it at the lower level to which it had then fallen. Newton
was in touch with both Locke and Lowndes, for both sides, the restorers
and the devaluers, recognized the importance of getting a person of
such outstanding stature on their side - as have later historians,
especially since Newton's written views were supposed, by Feavearyear
among others, to have been lost. Thus Feavearyear, incorrectly as it
happened, believed Newton to be 'in substantial agreement' with
Locke, while Craig though considering that Newton's view on the
contrary 'was close to Lowndes's of which he had doubtless been
informed', nevertheless fails to give Newton the credit for stating
unequivocally his support for devaluation and his clear statement of the
deflationary force of restoring the full value of the currency
(Feavearyear 1963, 134; Craig 1953, 186).
Luckily Newton's 'lost' writings on the recoinage problem, along
with those of Sir Christopher Wren, Sir John Houblon and others were
rediscovered in 1940 in the aptly endowed Goldsmiths' Library of the
University of London. In essence and shorn of their particular details,
the arguments between Locke and Lowndes have been repeated
frequently since then, Locke being the sound-money man conservatively
opposed to the dangers of what a later generation of Americans would
THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
247
call monkeying about with money, whereas Lowndes thought that
money could in certain circumstances and within reasonable limits be
managed, and so believed the standard weight for the pound had not
been immutably fixed for all time.
In substance, though not in every detail, Locke's views won the day,
supported as they were by the Chancellor of the Exchequer, by the
Court, and by most of the landed interest and conservative opinion. In
January 1696 an 'Act for Remedying the ill State of the Coin' was
passed, and for the first time since 1299 the weight standards were fully
restored, and for the first time ever, the full costs were to be borne by
the Exchequer. Locke's concept of the sanctity of the standard as a
historically given weight of precious metal became enshrined in the
minds of the authorities and was largely responsible for the ease with
which the kingdom moved gradually during the eighteenth century
towards the gold standard, which it did not officially embrace until
1816. The great 'Silver Recoinage' of 1696 thus turned out to have
unexpected long-term effects in paving the way for the gold standard.
The cost of the reform greatly exceeded the forecasts, coming to £2.7
million when total revenues were about £5 million. In addition hidden
real costs of some £1 million were inflicted on those, mostly among the
poor, who failed to send in their clipped coins by the due date. As well
as the Tower mint, branch mints at Bristol, Chester, Exeter, Norwich
and York were pressed into service to deal with the huge task of
recoinage. A total of £6,800,000 new milled silver coins was produced
during the three years of the recoinage period. The cost of the recoinage
was to be met - rather perversely in the Age of Enlightenment - by a tax
on windows. Because the proceeds of the tax naturally took a year or
two to assess and collect, the immediate costs were met in a variety of
novel ways highly relevant to the development of banking, to be
examined shortly. Suffice it to say that by the time our greatest scientist
was promoted from Warden to Master of the Mint on Christmas Day
1699, the enormous task of the full restoration of the coinage had been
completed. 'The recoinage may have lacked the intellectual depth and
universal significance of the Principia Mathematical (probably the
greatest single work of science ever published) but if it had failed it
could have broken the English economy and provoked social upheaval
comparable to that of the Civil War.'1
During the latter years of his period as Master an attempt was made
to reopen the Dublin mint so as to increase the amount and improve the
standard of the copper currency of Ireland, but since there was no
agreement regarding who should meet the costs nothing came of the
1 M. White, Isaac Newton (London, 1997), p. 259.
248
THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
plan. The lack of small money in Ireland had grown to such a pitch that
'manufacturers were obliged to pay their men in tokens in cards signed
upon the back, to be afterwards exchanged for money' (Ruding 1840, II,
68). A more ambitious attempt to supply good-quality money followed
in mid-1722 when Parliament granted William Wood a licence to
manufacture halfpence and farthings for Ireland. Minting promptly
began in Bristol in August 1722, but the intense opposition in Ireland led
to the minting being stopped, even before its most famous opponent,
Dean Swift, uttered his protests in two sermons later published in his
Drapier's Letters (1724), which made it practically certain that the
minting would never recommence. In his Letters the Dean 'could see no
reason why we of all nations are thus restrained' from having their own
currency produced in their own mint. Sir John Craig however makes the
telling point that whereas in 1689 there were only thirteen Irish pence to
the English shilling (of twelve pence), 'compared with autonomous
Scotland, whose currency sank from parity to one-twelfth of English
values in the two centuries before 1600, the English did not do badly'
(Craig 1953, 369). Thus the Irish poor were left for many years further to
suffer from their own tokens and quaintly endorsed promissory cards, a
sort of anachronistic, involuntary, reverse credit card.
During the twenty-seven years of Newton's mastership, the emphasis
at the mint changed dramatically from silver to gold. Indeed, during the
whole of the eighteenth century only some £1,254,000 of silver was
coined, whereas for just the forty -five years between 1695 and 1740 some
£17,000,000 of gold was minted. At the same time much of the new silver
minted during the recoinage had disappeared from circulation. When the
principle so firmly established by the great reform, namely that the
pound sterling was a given weight of metal, became linked with the
revealed coinage preferences of the public, and particularly those of the
bankers, merchants and rich individuals who could now afford more
luxuries, then the gold standard had practically arrived, silently a century
or more before its legal enactment. Now just as the narrow focus of the
mint was changing from silver to gold, so the wider views of the
community at large were changing from a preoccupation with coins into
a growing appreciation of the role of various forms of paper substitutes
for money such as bills, receipts, notes, drafts, orders and cheques and of
the banking institutions that, in handling or issuing them, gave them
greater acceptability or liquidity.
The rise of the goldsmith-banker, 1633—1672
Bits and pieces of the banker's many functions - including the safe
THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
249
keeping of gold, silver and deposits of money; lending out such monetary
deposits as well as their own moneys; transferring money from town to
town and person to person; exchanging foreign coin and bullion and
discounting bills of exchange and tallies - had been carried out part-time
as a by-product of other trading activities in various parts of Britain for a
century or more before recognized indigenous 'bankers' emerged in
London by about the 1640s. London, as by far the largest town in the
country and with more than its fair share of the country's wealthiest
people, was a rapidly expanding domestic market. It was also normally
the centre of government, of domestic trade and, above all, of overseas
trade. The development of financial intermediaries enabled rich persons
to find profitable outlets for their surplus funds in London which
attracted money in increasing amounts not only from the Continent but
also internally. Provincial writers were loud in their condemnation of
London's power in drawing to itself the liquid wealth of the country. The
growing size and wealth of the city stimulated the growth of a vast market
in coal and food, making available capital for further investment in
agricultural improvements in a virtuous spiral which, after the Restora-
tion, led to a sizeable export in grain and a corresponding balance of
payments surplus financed by an influx of foreign capital. The greater
degree of specialization in financial activities that evolved into fully
fledged banking was thus largely the result of the insistent demands of
businessmen engaged in three main areas centred in London: the new
domestic markets in food and coal, the rapidly expanding markets
concerned with exotic commodities, foreign exchange and shipping; and,
in many ways the most important of all, the market in government debt.
England, and this meant mainly London, was already challenging
Holland as the world's entrepot. Its financial challenge in developing its
own banking expertise was a natural consequence. Previously, as we have
seen, the only true bankers in the sense of being full-time professionals
were immigrants, mainly Italian, German and especially Dutch. It was
true, as Richards (1929) says, that 'alien immigration helped to focus
English public opinion on the problems of currency and of banking'.
Although the initial impetus came from the Continent, the embryo capital
and money markets in London were growing so fast that once indigenous
banking began to take root it made rapid and sustained progress in this its
foundation stage from around 1633 onwards, skilfully modifying the
foreign models to its own particular requirements until the first major
check to its development was clumsily administered by Charles II in 1672.
At the beginning of the seventeenth century there already existed a
variety of different types of potential indigenous bankers, including the
wool brogger, the corn bodger, the textile merchant, the tax farmer, the
250
THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
pawnbroker, the goldsmith and the scrivener. In so far as simple deposit
banking is concerned it was the latter who first emerged into prominence.
'The shop of the Scrivener was the first English Bank of Deposit', for it
was he who was the first financial intermediary in England to make a
regular practice of keeping money deposits for the express purpose of
lending to customers (Richards 1929). The scrivener was a clerical expert
equipped with legal training or acquired legal knowledge, often an
official public notary, who was customarily employed in drawing up
contracts, wills, bills, bonds and mortgages, and so a respected,
confidential adviser normally entrusted with large amounts of money -
which he soon learned to put to good account, picking up many banking
skills in the process. As far as lending is concerned, it was the tax farmer
who grew to be particularly prominent in the Stuart period from 1604
onwards. Tax farming was a system by which a group of rich individuals
paid the king in advance a licence fee for the privilege of collecting for
him the various customs duties and taxes due locally, transferring to the
king on a monthly or quarterly basis the sums so assessed, minus a
generous allowance for their own expenses. The flow of taxes was thus
speeded up, regularized and of course passed through the hands of rich
and influential middlemen. In effect the farmers made loans to the king in
anticipation of the revenue. Their loans were supplemented by collecting
a stream of local deposits as well as customs which they profitably on-
lent to the king. Thus they 'acted as a kind of collective banking
syndicate, able to lend on a scale that no one individual (prudently)
could' (C. Wilson 1965, 98). The transformation of the age-old occupa-
tion of pawnbroking into a more regularized form of lending was actively
advocated in England. The model of the Italian 'montes pietatis', some of
which grew into large-scale public banks, was not followed, though the
pawnbroker was then and continued to be an indispensable lender for the
poorer sort of trader. His functions remained too narrow in scope and
size to be properly considered as banking. It was not the ubiquitous
pawnbroker or tax farmer who grew to be a proper banker; rather it was
the metropolitan goldsmith, further emphasizing and reflecting the rising
importance of London as a European financial centre.
The first stage in the transformation of goldsmiths into bankers took
place when a number of them became actively engaged as dealers in
foreign and domestic coins, for reasons already discussed. Gradually a
clear distinction emerged between the 'working goldsmiths', and the
'exchanging goldsmiths' from which latter group the true bankers
typically emerged. The use of the goldsmiths' safes as a secure place for
people's jewels, bullion and coins was obviously increased following the
'seizure of the mint' in 1640 and the outbreak of the Civil War in 1642.
THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
251
The goldsmiths' interest in exchanging coinage thus became linked with
the keeping of demand deposits and the recording for the customer of
his 'running cash' or current account. The insecurity of life and property,
given the ravages of war, plague and fire during this period not only
meant that customers sought the security of the goldsmiths as never
before, but since the ordinary demand for goldsmiths to make objects of
gold and silver for the customers had at that time practically ceased, the
goldsmiths actively welcomed their new or enlarged banking-type
business. Their outlets for lending to private customers and to
government grew to be so essential and profitable that in order to attract
more deposits they began to offer to pay interest on time deposits.
Although current accounts were firmly established under the
Commonwealth, 'there is no evidence of time deposits prior to 1660'
(Richards 1929). Within the next few years there was a considerable
expansion in this type of deposit, a position summarized in this oft-
quoted comment by Defoe in his Essay on Projects (1690): 'Our bankers
are indeed nothing but goldsmiths' shops where, if you lay money on
demand, they allow you nothing; if at time, three per cent.'
It was the paperwork associated with these activities which formed
the essence of the new banking initiatives developed by the goldsmiths
at this time, in particular the cheque and the inland bill (which grew in
imitation of the original internationally traded bill of exchange), and
the banknote, which was an adaptation of the original goldsmith's
receipt. What started out simply as paper records of credit transactions
and transfer payments gradually became transformed into a significant
extension of the metallic money supply. To the goldsmiths it was a
natural step to add to their business of exchanging foreign coins that of
purchasing, at a discount, bills of exchange. All the merchants of any
size had long been familiar with the money market in bills, traditionally
dominated by the foreign exchange markets in Antwerp and
Amsterdam with literally thousands of members. The London
goldsmiths now began to take over some of this business, for they were
in a position to know the credit rating of the issuers and endorsers of
the bills. They quickly extended their expertise in handling overseas
trade bills to dealing in inland bills and, of crucial importance to the
government, to the tallies and other assignable credit instruments being
issued in a flood by the Stuarts and the Commonwealth. By their
dealings in bills, the general liquidity of the money market was
significantly enhanced, an increase in the quality again acting as a
supplement to the traditional quantity of money.
The earliest extant English cheque (now in the Institute of Bankers'
Library in Lombard Street) dated 1659, is an order by a Nicholas
252 THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
Vanacker addressed to the London goldsmiths Morris and Clayton to
pay a Mr Delboe 'or order' the sum of £400. 2 The author of the History
of Negotiable Instruments in English Law makes it clear that such
cheques were modelled on the bill of exchange and that it was the
goldsmiths, not the scriveners, who first developed cheques, although
they were called by a variety of other names, such as notes or bills. 'It
was not until well into the eighteenth century that the word "cheque",
or "check", as it was then spelt (and still is of course in America), came
to be applied to this type of instrument on the analogy of the real
treasury or "exchequer"' (Holden 1955).
The earliest extant English goldsmith's receipt appeared some twenty-
six years before the cheque and was issued by Laurence Hoare in 1633. A
goldsmith's receipt or note was evidence of ability to pay; of money in
the bank. At first such receipts were issued to named customers who had
made deposits of cash, and in time became negotiable just like endorsed
bills of exchange. Then 'some ingenious goldsmith conceived the epoch-
making notion of giving notes not only to those who had deposited
metal, but also to those who came to borrow it, and so founded modern
banking' (H. Withers 1909: 20). This position was reached by the 1660s.
We owe our evidence for the earliest recorded English case of a banknote
used for payment to that fount of social and economic knowledge, the
famous diary of Samuel Pepys, Secretary to the Navy. In his entry for 29
February 1668 he casually mentions sending to his father a note for £600
— issued by the goldsmith Colvill. When the notes were issued not to a
named person but to bearer, the modern bank promissory note had
arrived, at least in practice if not in legal propriety. Difficulties occurred
from time to time over enforcement of payment for endorsed bills and
notes. Lord Justice Holt confirmed the negotiability of inland bills in
1697 but there still remained doubt about the negotiability of notes. It
required a special act of codification and clarification, the Promissory
Notes Act of 1704, to confirm the legality of the common practices and
customs that had been developed by the goldsmith bankers since the
1640s, and thus belatedly to remove what had been an irritant to the
bankers' progress. A far greater obstacle had however been royally
thrown across their path early in 1672.
Tally-money and the Stop of the Exchequer
'To the Exchequer,' writes Pepys on 16 May 1666, 'where the lazy devils
have not yet done my tallies.' We have seen, in chapter 4, how these
2 Spufford (1988, p. 395) dates the earliest Florentine cheque to 1368 and shows they
were in common use there within a hundred years.
THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
253
notched sticks came to play a greater role in English government
finance than anywhere else. Tallies were reaching the zenith of their
importance in Pepys's time. The reason for the delay in producing
tallies for Pepys's Navy Department and for all the other government
departments was the inordinate increase in the number and size of
tallies because of the vast increase in the number of creditors and the
larger totals of individual loans respectively. When the Oxford
Parliament of 1665 granted Charles II an 'Aid' or tax of £1.5 million, the
issue of tallies, made as usual in anticipation of the revenue from this
Aid, was accompanied by Exchequer Orders to Pay, allocating the
revenues to the holder of tallies in strict rotation. Just like the normal
tallies, the new orders were also assignable, i.e. the claim to revenue
could be officially passed on to someone else on maturity. Furthermore
just as the tallies had become negotiable by written endorsement, so,
and much more conveniently, were the new paper orders, and they
similarly carried interest. These two features of assignability and
interest made the tallies and orders highly attractive to the goldsmith
bankers who, buying them up at a profitable discount, became by far
the major holders of outstanding government debt. J. Keith Horsefield
in his 'Stop of the Exchequer Revisited' (1982, 511-28) shows that
'between 1667 and 1671 the practice grew up of issuing orders not
against the proceeds of specific taxes, but against the revenue in
general' with the important result that 'Since the orders were no longer
tied to revenue already voted, there was no automatic limit to the
number issued.' Charles had found the key to a new treasure house, an
elastic increase to the revenue, and readily yielded to the temptation
now available. The improved liquidity of the tallies and orders as a
result of the market made in them by the goldsmiths virtually turned
them into interest-bearing money. Their increased use economized on
scarce coinage and allowed the small investor with just £20 or so to play
his part in the greatly enlarged market in short-term government debt.
However, in order to induce the investing public in an increasingly
saturated market to lend still greater amounts on the general security of an
unbuoyant tax base, the king (who was believed to have authority to
breach the usury laws) was forced to offer rates of 8 or 10 per cent, and
even offered agents 2 per cent as an inducement to find large borrowers.
Before the crisis broke, even the goldsmiths themselves, despite the 6 per
cent legal maximum, were offering depositors of near-demand deposits 5
or 6 per cent regularly, in order to carry out discounting at very much
higher rates. Pepys himself was getting 7 per cent from Viner for money at
just two days' notice in 1666. With the expansion of the issues of
Exchequer Orders the goldsmiths had reached a position in late 1671 of
254
THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
being so fully loaned up that they refused the king's request for moneys
urgently required for the navy. In reply he issued a Proclamation on 2
January 1672 prohibiting payment, with certain exceptions, from the
Exchequer. Such was the infamous 'Stop of the Exchequer', which con-
temporary opinion (and the earlier economic historians) viewed as having
a disastrous effect on the goldsmith bankers. This opinion has, by and
large, been recently reinforced by the careful researches of J. K. Horsefield,
thus correcting the erroneous views of Richards (in his Early History of
English Banking, 1929) which held fashionable sway for fifty years, namely
that the goldsmith bankers had not been too badly affected. There is no
doubt that it was the bankers who were left holding the vast bulk of assets
made suddenly illiquid by the Stop in this grim game of musical chairs.
The first result of the Stop was the shock to royal credit. Had it not
been for the Stop, Britain might have had a permanent issue of state
notes. In fact for a time Exchequer paper orders had replaced tallies.
But the Stop revived memories of the seizure of the mint in 1640, and
Pepys echoed public concern in thinking that it demonstrated 'the
unsafe condition of a bank under the monarchy'. Despite an immediate
run on the goldsmiths, which forced them temporarily to suspend
payment, they weathered the initial storm, and the fatal effects on their
credit took some time to take their toll. This was largely a tribute to
their original strength rather than to the exceptional payments allowed
out of the Exchequer, for in contrast to the position in 1640, the
goldsmiths as a group were never to be repaid in full, and the tardy,
partial repayments that were eventually made merely prolonged the
death agonies of the leading goldsmith bankers. The odium which
rightly attached to the exchequer orders was undeservedly but
understandably spread to include the notes issued by the bankers
themselves. 'Goldsmiths' notes became unacceptable as a general
means of payment 'partly because the Treasury itself altered its habits
and stated them as 'not now money', so that 'it was not until 1680 that
they again agreed to accept goldsmiths' notes' (Horsefield 1982, 523).
The Stop, which had originally been intended to last just one year,
was extended for two more years and then indefinitely. Of the total
debt, including accrued interest, which together totalled £1,314,940 in
1677, by far the greatest amount, £1,282,143, or some 97.5 per cent,
was owed to the bankers. Horsefield's researches further show that Sir
Robert Viner was owed £416,724; Blackwell £259,994; Whitehall
£284,866; and Lindsay, Portman and Snow each between about £60,000
and £80,000. Eight other bankers were owed a total of just under
£100,000 altogether. Reluctantly Charles agreed to pay 6 per cent
interest - the legal maximum - but this itself failed to recoup their
THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
255
losses, for as we have seen, the goldsmiths had themselves been offering
depositors that rate and more to purchase the debt in the first place.
After the Glorious Revolution of 1688 William and Mary were hesitant
in meeting the claims of the goldsmiths, who were blamed for having
extracted an illegally high rate from the king and so deserved to have
their fingers burned. In 1705 the interest on the bankers' debt was
reduced to 3 per cent, and to 2Vi per cent in 1714, when the capital sum
was written down to about half its original nominal value. The
remaining debt was then absorbed into the general national debt and no
longer separately identified. Thus at long last the bankers or their
inheritors were repaid only about half of their original debt and
received an average true rate of interest of just about IV2 per cent.
No wonder the Stop had such a ruinous effect on most of the original
bankers. All six of the largest holders of debt eventually failed. In 1684
the largest, Viner, failed, and then, in order of size, Blackwell was
declared bankrupt in 1682; Whitehall was imprisoned for debt in 1685;
Lindsay absconded in 1679; Portman became bankrupt in 1678 and
Snow was in prison for debt in 1690. Five of the eight next largest
debtors also failed. In addition, according to Horsefield's careful
reckoning, some 2,500 depositors, including owners of funds support-
ing a number of widows and orphans, were adversely affected. A few
famous names, such as Child's and Hoare's survived, while a new
generation of unscathed goldsmiths arose to fill the gaps. Perhaps the
greatest casualty of the Stop was the setback to all the many plans afoot
in the 1660s and early 1670s to establish a large public bank on the
continental model. Horsefield points out that whereas at least twenty
new companies were formed between 1672 and 1694, not one of them
was a bank. Thus, he concludes, 'the most significant effect of the Stop
was to postpone for as much as ten to fifteen years the beginning of
joint-stock banking in England' (1982, 528).
Foundation and early years of the Bank of England
Of the hundred or more schemes for a public bank put forward in
Britain in the seventy years after 1640 (and most thoroughly analysed
by J. Keith Horsefield in British Monetary Experiments, 1650-1710),
only two successfully overcame the many pitfalls that caused all the
others to flounder and fail. The various sporadic proposals tentatively
suggested in the earlier years, and put into abeyance by the Stop of the
Exchequer, reached an intensity of purposeful effort in the first half of
the 1690s, for reasons about to be examined. Before doing so it will be
of use to taste the flavour of some half-dozen of the earlier concepts,
256 THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
since the ideas contained therein greatly influenced the nature of the
more mature discussions which reached their fruition in the 1690s.
The chronological leader is probably that of Henry Robinson who in
1641 published a 62-page pamphlet, England's Safety in Trades
Encrease, based on the example of the long-established Italian banks.
However when 'in the second half of the seventeenth century
Amsterdam displaced Genoa as the world market for precious metals',
Holland increasingly became the popular model for imitation in
monetary experiments (Kirshner 1974, 227). To William Potter writing
in 1650 the 'Key to Wealth' was to be found in a plentiful issue of
banknotes to form the basis of tradesmen's credit. Samuel Hartlib, in his
Discoverie for the Division . . . of Land (1653), set forth the Bank of
Amsterdam, with which British merchants were becoming increasingly
familiar, as his model for a Bank of England, but insisted that insofar as
Potter's ideas for note issue were concerned, 'There be no way to raise
this Credit in Banks but by mortgage of Lands', thus foreshadowing the
land bank craze of the 1690s. Hartlib also outlined a scheme for
country-wide money transmission using a primitive precursor of the
cheque system (Horsefield 1960, 94-5). In 1658 Samuel Lambe, a
London merchant, proposed a Bank in London governed by trusted
leaders from the chartered companies, such as the East India, Muscovy
and Levant companies, again in imitation of the Amsterdam Bank.
Probably first written in 1663, but not published until 1690, was Sir
William Killigrew's idea for a state issue of notes in anticipation of taxes,
which may well have formed the source for the paper Exchequer Orders
issued between 1667 and 1672, described earlier. Also in the mid-1660s a
number of writers, such as Hugh Chamberlen, in his Description of the
Office of Credit (1665), advocated 'Lombards' or 'Lumbards' where
credit would be allied to pawnbroking, with varying emphasis on the
dual purposes of providing working capital for traders and funds for
charity. All the main aspects of the above proposals came to a head in the
exciting and euphoric experiments in the dramatic three-year period
from 1694 to 1696 which saw the founding of the Bank of England and
the Bank of Scotland, the issue of Exchequer bills, attempts to establish
the Land Bank and the Orphans' Bank, the Million Act, various new
lotteries, poll taxes, excise taxes and window taxes, and of course, the
start of the great recoinage already described.
The plethora of pamphlets in favour of a public, joint-stock bank
gave rise to a number of optimistic projects of which the Bank of
England turned out to be by far the most important. Dislike of the
usurious practices of the goldsmith bankers was a prominent motive
stirring on the projectors of potential new institutions. The maximum
THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789 257
legal rate of interest, reduced from 10 per cent to 8 per cent in 1624 was
brought down further to 6 per cent by the Commonwealth government
in 1651 and legally reconfirmed at that level by the Restoration
government in 1660. In 1690 a proposal to bring the rate down to 4 per
cent was lost in Parliament by just three votes. There was a certain
amount of wishful thinking about such maxima, but they did mirror
the market trend. The laws were commonly flouted and, except for
occasional vindictive cases, a blind eye was turned on marginal
infringements. The usury laws were also more strictly interpreted for
loans than for discounts. Even so rates of discount of 20 or 30 per cent,
which were charged by a few goldsmiths at times of crisis when
shortages of cash were at their height, or when the tallies or paper bills
being discounted were of doubtful value or where it was uncertain that
they would actually be paid on the due date, seemed inexcusable to the
business community at large who turned the deserved particular
condemnation of the relatively few into a general accusation against the
monopolistic power supposedly exerted by all the goldsmith bankers
almost all the time. A new public bank would thus achieve the dual
related aims of reducing the rates of interest through breaking the
goldsmiths' monopoly. Furthermore these beneficial micro-economic
effects would work throughout the whole business world to bring about
macro-economic gains in the shape of greater national wealth. Little
wonder that commercial interests in the City in the 1690s were
optimistic and impatient with regard to setting up their own joint-stock
bank, confident of widespread support. If the one essential but hitherto
missing ingredient, namely the support of the government could be
secured, the battle for the Bank of England would be won.
Thus the Bank of England was born out of a marriage of convenience
between the business community of the City, ambitiously confident that it
could run such a bank profitably, and the government of the day,
desperately short of the very large amount of cash urgently needed to
carry on the long war against Louis XIV, the most powerful ruler in
Europe. These needs were growing at a far faster pace than the lending
resources of the goldsmiths, combined with the new forms of taxation,
largely copied from the Dutch, could supply, despite the strong support of
Parliament (see D. W. Jones, 1988). The tremendous increase in the
financial demands being made by the government in the final thirty years
of the seventeenth century are shown in the following revenue and borrow-
ing statistics (taken from Chandaman 1975, 504). In the period 1670 to
1685 the total net fiscal revenue came to £24.8 million; it more than
doubled to £55.7 million in the following corresponding period from 1685
to 1700. The figures for net borrowing show a spectacular seventeenfold
258
THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
increase from a total of just £0.8 million in the first period to £13.8 million
in the second period. These figures indicate not only the growing cost of
lengthy wars but also the government's need to rely much more on
borrowing than previously. Even more significant for the history of
banking and of the national debt was the need to be able to tap new
sources of long-term borrowing, rather than simply relying on the short-
term, hand-to-mouth expedients which the Tudors and Stuarts had been
forced to adopt. It was thus from the urgent discussions of how to raise a
'perpetual loan' at a rate of interest economical to the government and yet
readily acceptable to the lenders - because of the other benefits attached
to the deal — that the Bank of England came into being. If Parliament (and
no longer just the monarch) had the responsibility of repaying a
substantial loan, even if long-term, then some future generation would be
faced with heavy and possibly unsupportable burdens of taxation when
taxable capacity was already thought to be at or near its limit. However, if
the lenders could be induced to make a permanent loan then the
additional taxation required to be raised at any time would be just a
fraction of the total loan, being simply the annual interest or service
charge. It was that canny and much misjudged Scot, William Paterson,
who first conceived a viable plan for this sprat to catch a massive mackerel.
Paterson was born in Tynwald near Dumfries in 1658 — incidentally
barely ten miles from the later birthplace of the Revd Dr Henry
Duncan, father of the savings bank movement. Historians tend towards
hysteria in their assessments of Paterson's life and work, for his gift for
arousing controversy lives on after him. To some, e.g. Andreades,
'Paterson was a genius' but 'bold even to rashness', possibly still the
best summation of this complex character. His contemporary, Daniel
Defoe, spoke most highly of him, as did his compatriot, Sir Walter
Scott, a view shared by the author of a brief, but well-researched recent
biography (Evans 1985). However, the official historian of the Bank of
England, Sir John Clapham, loftily dismisses Paterson as a 'pedlar
turned merchant'; repeats Macaulay's cheap gibe that 'his friends called
him a missionary, his enemies, a buccaneer'; states unequivocally that 'I
think him an overrated person' not really worthy to have his portrait, if
a fitting one were available, in the Bank's official history; and, more
seriously, even questions whether he was 'strictly' the originator of the
'final' scheme for the Bank, or was 'merely the mouthpiece' of a City
pressure group. But this final scheme was only one of at least three such
schemes in which Paterson played the leading role and which were laid
before various parliamentary committees and Charles Montagu,3
3 The Montagu family sold its Newcastle coal trading business to the Bowes Lyons,
forebears of Elizabeth, the late Queen Mother.
THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
259
Chancellor of the Exchequer, between 1691 and 1694, as is shown
conclusively by J. Keith Horsefield in his detailed researches in British
Monetary Experiments 1650-1710 (published ten years before
Clapham's official account, but nowhere mentioned by him). That
Paterson's project was finally enthusiastically adopted, despite his
awkwardness, speaks volumes for its merit, which was clearly
recognized by Montagu, who rallied the Court and Parliament to the
cause, and by Michael Godfrey, the three Houblon brothers, Sir Gilbert
Heathcote and others who organized backing from the wealthy City
interests. These all became founder members of the board of directors
of the Bank of England, but Paterson was dismissed after seven short
months, mainly because he had become involved with the supporters of
the scheme by means of which the London 'Orphans' Fund' became
transformed in 1695 into a bank, and therefore was seen by the Bank of
England as a competitor and Paterson's position as disloyal. Paterson's
claim to the gratitude of Londoners extends beyond the financial field,
for it was largely owing to his energetic support that the Hampstead
and Highgate Aqueduct Company was formed in 1691 to supply its
citizens with fresh, clean water. Paterson failed however in his visionary
ambition to set up in London a 'Library of Commerce', which among
other benefits might have provided historians with a surer foundation
for some of their generalizations about the City and its financial
institutions, including the true merit of Paterson himself.
The Bank of England came into being by the Ways and Means Act of
June 1694 and was confirmed by a Royal Charter of Incorporation (27
July 1694). The Act makes it clear that its real purpose was to raise
money for the War of the League of Augsburg by taxation and by the
novel device of a permanent loan, the bank being very much a
secondary matter, though essential to guarantee the success of the main
purpose. The Act was also known variously as the 'Tonnage' or
'Tunnage' Act, because the taxes were to be raised from both ships and
wines, for the carrying capacity of ships was then commonly measured
either by the 'weight of water displaced' method, or, which came to very
much the same thing, the number of large casks or 'tuns' of wine (of
252 gallons, equalling when allowance is made for evaporation, 2,240
pounds or one ton weight approximately), which the ship could carry.
This explains the preamble of An Act for granting to their Majesties
several Rates and Duties upon Tunnages of Ships and Vessels, and upon
Beer, Ale, and other Liquors; for securing certain Recompenses and
Advantages ... to such persons as shall voluntarily advance the Sum of
Fifteen hundred thousand Pounds towards carrying on the war against
France'. The £1,500,000 was to come from two unequal sources;
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THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
£300,000 from annuities, and the major sum of £1,200,000 from the
total original capital subscriptions to the 'Governor and Company of
the Bank of England'. In return the Bank was to be paid 8 per cent
interest plus an annual management fee of £4,000. Thus for just
£100,000 a year, and some vague privileges to a bank, and with no
capital repayment burden to worry about, the government received
£1,200,000 almost immediately. The whole amount, 25 per cent paid up,
was subscribed within twelve days, and the total sum was in the hands
of the government by the end of 1694. This was an astonishing success
given the abject failure of a number of rival banking-type institutions,
but not so surprising given the speculative boom in other kinds of
companies being formed around the same time. From the government's
point of view it was an object lesson of the advantages of borrowing as
compared with taxation to meet sudden emergencies. Paterson was
right in saying that, to the government, the bank was only 'a lame
expedient for £1,200,000' - but the government had other priorities.
During its passage through Parliament two significant amendments
were made: to placate the Tories the Bank's power to carry out
commercial trading was strictly limited, while to please the Whigs a
more important limitation was placed on its power to lend to the
Crown. The by-laws of the Bank did allow for the sale of any
merchandise received through pawnbroking, then considered by some
to be an acceptable ingredient of a proper range of banking services;
but apart from an initial flurry, such operations soon dwindled to
insignificance. It was quite a different matter with regard to the Bank's
lending to the government, and it did not take long for the Bank and the
government together to find ways around the restriction which the
Whigs first intended to fix at a ceiling of the original £1,200,000 capital.
Even the Whigs relaxed their attitude when it became obvious that
Parliament had discovered new ways of limiting the powers of the king.
The capital of the Bank was widely spread by limiting the maximum
ownership of the original shares to £10,000. King William and Queen
Mary each subscribed the maximum. The pattern of ownership, with
medium and large holdings together taking up 92.3 per cent in value
terms, is shown in table 6.1.
Although the Bank had thus got off to an excellent start it was soon
to experience difficulties so immense that its continued existence
seemed very doubtful. The natural antipathy of the goldsmith bankers
was to be expected, and concerted withdrawals of cash did occasionally
occur. Such opposition was in the main short-lived and was less
damaging than earlier writers, like Clarendon and Andreades had
THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
261
Table 6.1 Bank of England stock holdings, July 1694.
Size
Holdings
Total value
Total
% value
No. %
£300 & under
£300-£l,999
£2,000 & over
561 37
778 52
170 11
£92,550
£530,350
£577,100
7.7
44.2
48.1
1,509 100
£1,200,000
100
supposed. A few important goldsmith bankers, especially Charles
Duncombe remained stubbornly hostile, but the value and convenience
of having an account with the Bank soon began to be widely
appreciated, so that in general the goldsmiths followed the example of
Richard Hoare and of Freame and Gould (forerunners of Barclays) who
both opened accounts in the Bank in March 1695. In course of time the
goldsmiths gave up their own note issues and used Bank of England
notes instead, to their mutual advantage. What the Bank feared most
was the threat posed by the establishment of rival public banks, though
in retrospect such fears are seen to have been largely unjustified. We
have noted the Bank's furious reaction to Paterson's support for the
plan by which the City of London Orphans' Fund transformed itself
into the Orphans' Bank in 1695. By 1700 it had petered out of existence.
The Million Bank was also founded in 1695 and combined its main
activities of dealing with lotteries and annuities with more general
forms of banking. However it also soon relinquished its banking, but it
continued to carry on acting as an investment fund for government
securities for a century.
Daniel Defoe's idea that 'land is the best bottom for banks' was
widely and uncritically held. It was naturally very popular with Tories
and landowners who hoped that by setting up some form of land-based
i.e. mortgage-based bank, they would compete destructively with the
Bank of England, felt to be too wedded to the Whigs, and at the same
time turn part of their valuable but fixed assets into something more
conveniently liquid and spendable. A series of such projects emerged,
backed by impressive personages such as Dr Hugh Chamberlen, John
Briscoe, John Asgill, Dr Nicholas Barbon (prominent in insurance) and
Thomas Neale (who had preceded Sir Isaac Newton as Master of the
Mint). The two most prominent among these schemes merged their
forces and so managed to bring a bill before Parliament for a National
Land Bank which received royal assent on 27 April 1696. Its supporters
hoped to outdo the Bank of England by raising a total subscription of
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THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
£2,564,000. The result was utter fiasco. When the subscription list was
closed the total came to £7,100 of which the cash, at the initial call of 25
per cent, was, apparently, £1,775. But the subscription included the
king's promised £5,000, so that when allowance is made for this the
total subscriptions promised by the public came to only £2,100 and the
total cash reluctantly handed over by them came to the derisory amount
of £525. The boom for land-banks had burst, and the concept was only
to be revived in a much modified form a century later when the first
building societies emerged.
Two matters of far greater concern to the Bank, both of which
drained it of cash, were, first what was known as the problem of the
'Remises', and secondly 'the Ingrafting of the Tallies'. The former
involved the speedy and reliable remittance of hard cash to pay the
troops in Flanders. This task was undertaken with deadly enthusiasm
by the Bank's deputy governor, Michael Godfrey, who during the siege
of Namur in July 1695 and despite royal warnings against exposing
himself to unnecessary danger, insisted on standing alongside the king-
until he was struck by a French cannonball, and thus, to use Clapham's
phrase, the Bank lost its best head. But Godfrey had succeeded in
establishing a system whereby the army received its funds promptly -
yet another example of how the Bank helped the government in its
efforts to defeat Louis XIV The abject failure of the Land Bank left the
government with no support for its tallies, which fell to a discount of 40
per cent; indeed some tallies of distant maturity had become virtually
undiscountable.
This lack of public confidence in the new credit institutions
coincided with the great shortage of cash because of the recoinage and
reacted upon the price of the stock of the Bank of England which fell
from 108 in January 1696 to only 60 by October. Nevertheless in this
crisis the government was forced once more to turn to the Bank, which
agreed to take up most of the problem tallies, upon which the Treasury
agreed to pay 8 per cent. By an Act quickly rushed through Parliament
on 3 February 1697 the Bank's authorized capital was increased by
£1,001,171, subscribers being allowed to pay up to 80 per cent in tallies
and the rest in banknotes. Thus instead of a diffused and difficult
multitude of public debtors holding tallies requiring total repayment of
both interest and capital within a definite period of time, the
government was now simply faced with a single, more manageable
creditor and had exchanged a series of short-term debts into part of the
permanent or 'funded' debt on which interest only was payable. By such
means a sizeable proportion of the government's outstanding tallies
were 'ingrafted' into the Bank's capital stock. In return a grateful
THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
263
government, as well as allowing the Bank to increase its capital - and
therefore also its permissible note issue (by £1,001,171) - granted the
Bank four other privileges. First, the death penalty was prescribed for
forging its notes, i.e. the same penalty as for counterfeiting the king's
money. Secondly, the Bank's property was exempt from taxation.
Thirdly the Bank's charter was extended until 1711. Fourthly, and in
retrospect the most important, no other company 'in the nature of a
bank' could legally be established during its existence. The Bank had
weathered another storm, and the price of its stock rose almost to
parity, reaching 98 when the Peace of Ryswick was signed in September
1697.
The Bank's supposed monopoly did not however remain
unchallenged for long for, between 1704 and 1708, a number of
companies ostensibly not 'in the nature of banks' began issuing notes,
in particular the Mines Adventurers Company and the Sword Blades
Company. Responding to the Bank's complaints, an Act passed towards
the tail end of 1708 sought to clarify the position by specifically
forbidding associations of more than six persons from carrying on a
banking business, of which note issue was then considered to be an
indispensable part. The Act authorized the Bank to double its capital
and granted it a long-term renewal of its charter to 1733. Thus in 1709
under its new Governor, Sir Gilbert Heathcote, and with its total
capital and note-issuing powers standing at £6,577,370, the Bank
seemed supremely confident and secure. Any such complacency was
however quickly banished when its physical security was threatened by
the London riots of 1710, while its financially favoured position was put
at risk by the same Tory-inspired activities of the South Sea Company.
The Bank, said to be 'Full of Gold and Whiggery', was about to face its
greatest threat.
The national debt and the South Sea Bubble
The process by which the personal royal debt became transformed into
a parliamentary-controlled public or national debt was neither simple
nor sudden, but formed part of a complex series of hesitant steps over a
period of thirty years from the 1660s to the 1690s. We have already
traced certain essential aspects of this development immediately after
the Restoration of Charles II in 1660 in the practice of occasionally
borrowing, though for relatively short periods, in anticipation of taxes
or 'funds' granted by Parliament, a device which became both more
regular and for much longer terms after the Glorious Revolution of
1688, when the words 'the funds' came to mean the securities (tallies
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THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
and, increasingly, paper documents) issued by the government to back
such loans. It was not possible to raise really long-term loans on
reasonable terms until parliamentary control over the monarchy had
been secured and royal credit replaced by parliamentary guarantees.
Long-term or permanent debt required as an essential counterpart the
guarantee of permanent institutions rather than merely mortal
monarchs. Stuart extravagance had simply made this lesson all the
plainer. Thus although the foundation of the Bank of England in July
1694 is rightly taken as the origin of its permanent component, it is the
'Tontine Act', which passed through Parliament during December 1692
and January 1693, which strictly speaking should be taken to mark the
origin of the national debt.
The term 'tontine' is derived from its initiator, Lorenzo Tonti
(1630-95), adviser to his fellow Italian, Mazarin, at the French court
where he put his financial ideas to good effect. The tontine, which had
many variants, was a method of raising money from subscribers with
the rewards weighted heavily in favour of the longest survivors. By the
Tontine Act as modified during 1692—3 the government attempted, and
eventually succeeded, in raising £1 million. Its first alternative was to
promise subscribers 10 per cent until 1700 with an increasing share
thereafter for the dwindling number of survivors. The longest survived
until 1738 with an annual pension in his later years of around £1,000 on
his original investment of £100. Generally speaking, however, this first
alternative was unsuccessful, and managed to bring in only £108,000.
However the government's second alternative, a simple 14 per cent for
life, proved far more attractive and raised £773,493. The remaining
£118,507 required to make the first £1 million of the national debt was
raised later in 1693 by the issue of tax-free annuities, a rather costly
precedent. A further Annuity Act in 1694 enabled subscribers to
nominate their beneficiaries (within limits, they could usually nominate
the youngest of the participants) and hence was particularly though not
exclusively taken up by families. It raised some £300,000.
The annuity principle meant that the government could raise a really
long-term loan without ever having to repay the principal - one of the
key concepts behind the scheme for the Bank of England — and also
meant that it was faced, depending on the choice of scheme, with a
progressively declining interest payment, thus relieving the burden on
posterity. In the same hectic year of 1694 the government brought in the
so-called Million or Lottery Act, intending to raise that amount by
issuing 100,000 shares of £10 at 10 per cent with the added attraction of
the possibility of sharing in the total of £40,000 put up each year for
prizes. Shares in these lottery tickets were subdivided by zealous agents
THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
265
into smaller sums, despite which the scheme failed to reach the total
anticipated. The successful launch of the Bank of England more than
made up for this disappointment. The lottery tickets and shares for
both the Million Funds of 1693 and 1694 were accepted as subscriptions
to the capital of the Million Bank, which, as we have already seen, soon
dropped its initial ambitions to compete in banking activities with the
Bank of England and settled down instead into being an investment
fund for government securities, acting as agents for the general public,
particularly the small investor. However it was not the small, private
investor, but rather the large joint-stock companies that took up the
major portion of the national debt, and in so doing became powerful
rivals of the Bank of England in courting the favours of the government,
to the great discomforture of the Bank. Prominent among such
competitors were the two East India Companies (reunited in 1702), and
above all the South Sea Company, the rise and fall of which was to play
a crucial role in the history of finance and of company law, and hence
had long-lasting effects on industrial development as well as on
banking, not only in Britain but also in the USA.
The parliamentary Act incorporating the 'Governor and Company
of Merchants of Great Britain trading to the South Seas and other parts
of America, and for encouraging the Fishery' was passed in 1711. Apart
from stimulating whale fishing, its main purpose was to break into the
Spanish monopoly of trade with Central and South America. Following
Marlborough's successes in the War of Spanish Succession the Asiento
Treaty' was signed on 26 March 1713 by which the South Sea Company
gained the right to send 4,800 Negro slaves annually to the Spanish
colonies and to send out to Portobello annually one general cargo ship
of up to 500 tons - quotas not regularly achieved. On balance its
trading activities turned out to be only moderately successful, and its
special privileges were subsequently abolished by the Treaty of Madrid
(1750) in return for a useful sum of £100,000 in compensation, while its
slave trading was abolished by the general Anti-Slave Trading Act of
1807. The limited success of the company's first voyage in 1717 did
nothing to dampen the enthusiasm of its promoters, a confident
posture increased when George I accepted the company's invitation to
become its Governor in 1718. It was not however through humdrum
matters of trade, but rather through its role as leader of the speculative
boom during 1719 and 1720, particularly in bidding for the national
debt, that the company has made its mark in international financial and
commercial history. The post-war boom was reflected also in France,
where John Law's banking experiments similarly had their exotic
counterpart in the Mississippi Company. The failure of Law's
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THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
ambitious schemes did not check the advance of the boom in company
formation and stock prices in Britain, where some 200 new companies
were formed between mid-1719 and mid-1720. Such buoyant conditions
seemed to provide the government in Britain with an ideal opportunity
to reduce the burden of the national debt.
King George's speech in opening Parliament in November 1719
therefore voiced the government's view to see an early and significant
reduction in the debt. The resulting committee of Parliament endorsed
a proposal made by Sir John Blunt on behalf of the South Sea Company
that this company would take over all the state's outstanding debts at 5
per cent until 1727 and 4 per cent thereafter, and that in addition the
company would pay the government £3.5 million for the privilege.
Parliament decided however to see what other companies might offer.
The Bank of England, fearful of losing its special position in the City,
rashly promised £5.5 million for a roughly similar scheme. It was saved
from its folly when the South Sea Company in reply raised the value of
its bid to £7,567,000 in return for converting all the outstanding debt,
amounting to £31 million, not already held by the Bank of England and
the East India Company. In modern terminology, the South Sea
Company was offering to 'privatize' the national debt; in contemporary
terms and methods it was 'ingrafting' the national debt into South Sea
Company shares. Investors could buy South Sea Company shares, then
rapidly appreciating and expected to pay very high dividends, with their
government stock, which was also appreciating though at a much
slower rate. The higher the price of South Sea shares, the greater the
amount of government debt which could be acquired by such transfers.
It was an apparently painless procedure, like betting with a double-
headed penny, so long as business confidence was maintained.
Credit was easily available from the new financial institutions. The
South Sea Company's speculative activities were strongly supported by
the Sword Blade Bank with which it shared common directors. South
Sea Company shares and those of other mushrooming companies rose
to record heights on a wave of easy and cheap credit. Holders of
unglamorous government securities rushed to exchange them into
South Sea Company shares. The speculative mania was such that its
shares, which had traded at 128, moderately above par, in January 1720,
rose to 330 in March, 550 in May and reached their peak of 1,050 in
August. Most of the 200 or so companies that had sprung up in the
previous twelve months were not fully paid up, since their shares had
been issued for quite small initial subscriptions, a feature which greatly
multiplied the effect of the credit base on the total volume of equity.
Junk companies were formed for the most unlikely or most vague
THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
267
purposes — perpetual motion, coral fishing, to make butter from beech
trees, to extract silver from lead, gold from sea water, and, most quoted
of all, 'for carrying on an undertaking of great advantage which shall in
due time be revealed'. During July and August as more and more calls
for cash for the remaining subscriptions were being made, so the
business atmosphere began to change.
Ironically the prick that actually burst the bubble was administered
by the South Sea Company itself, which while impatiently awaiting
parliamentary legislation, issued a writ questioning the legality of
eighty-six new companies. Rarely, has the proverb about digging holes
for others been better illustrated, for by focusing public attention on the
weaknesses and illegal status of so many of these new companies, it
exposed the vulnerability of credit-inflated companies in general, chief
of which was the South Sea Company itself. The company was
particularly concerned that the cash being called into these new
companies was weakening the potential flow into its own coffers and so
might endanger its grandiose scheme for taking over the whole of the
national debt before its task could be completed. To check this drain to
other companies, an Act, subsequently popularly dubbed the Bubble
Act, was introduced, following the South Sea Company's urgent
pressure, in May 1720 and became effective on midsummer day. The
main section of that Act set up two new insurance companies, the Royal
Exchange and the London Assurance. The bubble clauses were tacked
on. They declared that no joint-stock company could be established
without a charter authorized for a specified, definite purpose, and laid
down severe penalties for operating illegally, ranging from heavy fines
through forfeiture of all goods and chattels to imprisonment for life.
Strictly speaking, only the Crown could legally authorize a company
and only Parliament grant it exclusive privileges; but it had become the
general custom from the time of the Glorious Revolution of 1688 to
allow unauthorized companies to exist. These were now in for a rude
shock.
Financial consequences of the Bubble Act
Contemporary opinion and later popular history have claimed that the
'Bubble' had deep and widespread effects on the economic and financial
development of Britain. Despite some attempts by specialists to play
down its effects, the popular view is by and large the correct one and is
strongly supported by expert research. The strength of its immediate
effects is not in dispute. Almost before the ink of the Bubble Act was dry,
the rush for liquidity began, affecting initially the shares of the first two
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THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
'illegal' companies taken to court (from its list of eighty-six) by the South
Sea Company. By the end of August 1720 the rush had turned into a
general panic, leading before the end of September to wholesale
bankruptcy and the ruin of many hundreds of speculators. Already by 2
September South Sea stock was down to 700, falling to 200 before the end
of the month, and reached its low point of the year at 124 on 24 December
- still significantly above par and roughly at the level of the previous
January before the boom had properly got under way. Bank of England
stock, though much less volatile, had slumped from its 1720 high point of
265 to 135, its lowest point of the year. The notorious Sword Blade Bank
failed on 24 September. This 'bank' had been highly favoured by the
South Sea Company despite bitter attacks by the Bank of England which
accused it of infringing the monopoly of joint-stock banking conceded to
the Bank of England in 1708 and confirmed in 1709. The Bank was now
rid of its most awkward competitor as far as its commercial banking
operations were concerned. The South Sea Company remained in
existence until 1853 passively handling its much-reduced, but still
sizeable, portion of the national debt. But it had failed ignominiously in
its bid to take over the whole, or the major portion, of the debt. Never
again was the supremacy of the Bank of England's position challenged as
the major manager of the national debt, whether funded or unfunded.
Were it not for the 'Bubble' British governments might well have had their
own 'pet' banks, as later did the USA, with government deposits and
loans shuffled from one bank to another with every change of
government. The benefit to the nation resulting from the removal of this
destabilizing competition has never been fully appreciated.
On the other hand the strengthening of the Bank of England's
monopoly deprived England and Wales of strong joint-stock banks
during the early part of the industrial revolution and delayed their rise
for over a century. Perversely, however, the Bubble Act, which remained
on the Statute Book until 1825, made industry more dependent upon
banks for working capital than they would have been if company
formation had been easier. The Bubble Act made it difficult and costly
to set up a company formally, while the articles of incorporation, to be
legally acceptable, tended to stress the limitations on corporate action
just at the time when the utmost flexibility was required.
Deprived of equity capital, the rising industrial partnerships turned
to the partnership banks which supplied them with renewable loans as a
not inconvenient substitute for permanent capital. As Rondo Cameron
has made plain, in his study of Banking in the Early Stages of
Industrialisation (1967), 'the mere existence of the Act hindered the
flow of capital into industry' and so 'served to increase the importance
THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
269
of short-term finance for working capital provided by banking and
other sources of credit'. Similarly Professor A. H. John, in his work on
The Industrial Development of South Wales (1950) asks us 'to reverse
the accepted view of a rigid division between the growing industrialism
and the early banking system and to substitute one in which the latter
played a not unimportant part in the industrial development of the
period'. Professor Pressnell's authoritative study of Country Banking in
the Industrial Revolution (1956) shows how the banking restrictions
brought in during the period 1708 to 1720 'long outlasted any
reasonableness and by the time they were abolished in the legislation of
1825, 1826 and 1833 they had done much harm by depriving the
country of a banking system commensurate with a period of rapid
economic growth'. He goes on to show how many industrialists entered
banking, 'some to provide means of payment for workers and raw
materials' and others to provide
protracted short-term borrowing which added up to long-term borrowing.
Where deposits were received from the public, their employment in the
banker's own business resulted in a useful compromise between the
limitations of the contemporary law of partnership and the advantages in
the mobilisation of capital of the modern joint-stock company.
Thus the Bubble deeply influenced the form and methods of operation
of the banking system of England and Wales (but not so much in
Scotland) and also influenced the operation of the capital market and
the legal structure of companies in general for a hundred years or more,
not only in Britain but also overseas. It is clear that both company and
banking law in the USA were closely affected by the events in England.
'Ever since I read the history of the South Sea Bubble,' said President
Jackson to Nicholas Biddle, head of the Bank of the United States, 'I
have been afraid of banks.' So the President vetoed the extension of that
bank's charter in 1832 as being unconstitutional. In France, where the
corresponding Mississippi crisis had peaked earlier, John Law's banking
experiments perished in the flames of inflation, similarly delaying but
for even longer the establishment of a modern system of banking in
France.
Following Parliament's committee of inquiry into the Bubble crisis,
which reported in February 1721, the South Sea Company was
completely reorganized. Its directors were heavily fined, imprisoned
and had their estates confiscated, as did a number of others involved in
the general corruption. Among the large number of influential persons
convicted of bribery was the Chancellor of the Exchequer, John
Aislabie, who was expelled from Parliament, imprisoned in the Tower
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THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
of London and had his property confiscated to help to compensate the
victims of the crash. His replacement, Robert Walpole, who had
prophesied and profited from the Bubble, was brought back into office,
as Chancellor of the Exchequer and first minister, 'to save the country
in the crisis'. As the world knows, as well as solving the financial crisis
Walpole played a key role in three basic constitutional reforms, namely
the strengthening of the Treasury as the predominant department, the
development of the cabinet form of government and the emergence of a
prime minister as 'primus inter pares'. Here once more, partly as a
result of the Bubble, we see fundamental financial and constitutional
changes going along hand in hand. Walpole took a most active part,
along with the Governor and directors of the Bank of England, in the
reconstruction of the South Sea company and in the consequent
redistribution of the major part of the company's holdings of the
national debt. The Bank took over nearly £4 million of debt from the
company and in return was allowed to increase its own capital by a
similar amount. A grateful government also renewed the Bank's charter
for twenty-one years from 1721. As in the original South Sea scheme,
the general level of interest on outstanding government debt was
reduced in 1727 from 5 to 4 per cent, for Walpole had always been very
keen on reducing, and indeed if possible, eliminating the burden of the
national debt. (For a scholarly account of Walpole's role in the 'Rise of
the British Treasury' see D. M. Clark 1960.)
It is perhaps fitting that the idea for eliminating the national debt
should have come from none other than William Paterson who of
course had been largely responsible for the form in which it was first set
up. His 'Sinking Fund' concept was taken up in 1716 by Stanhope,
Chancellor of the Exchequer, and strongly supported by Walpole. They
arranged that all surpluses from taxation were set aside in a special
fund which, wisely invested, grew to a size substantial enough to reduce
the debt, and eventually, as the experiment was repeated, might even
have eliminated the total debt. Walpole persevered, and despite having
to 'raid' the sinking fund in 1734-5, managed to reduce the total debt
by £4 million by 1739. However, the outbreak of war in that year and
the even more costly and more frequent wars which followed rendered
the sinking fund concept inoperative, until it was temporarily revived
when the Younger Pitt set up the Commission for the Reduction of the
National Debt in 1786. In the mean time a few other reforms in debt
management are worth noting. Pelham successfully took advantage of
the low market rates of interest which prevailed in mid-century to bring
about a large 'conversion' of the national debt from 4 per cent to 3Vi
per cent in 1749 and followed this up by reducing the rates to 3 per cent
THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
271
for a large portion of the debt, the 'reduced threes', as they became
known, in 1750. In 1751 he brought together a whole untidy series of
annuities into a single new general stock, the famous 3 per cent
Consolidated Stock, or 'Consols'. Thus by the second half of the
eighteenth century most of the main aspects of a modern system of debt
management had already been established, efficiently administered by
the Bank of England as unquestionably the government's main agent,
acting as the key link between the growing markets for money and the
most secure form of capital available anywhere in the world.
The operations of other financial institutions such as the stock
exchange, insurance companies and friendly societies were also
considerably affected by the aftermath of the 1720 crisis. Investors,
cured for a time of their urge to speculate in equities, turned back to
dealing mainly in government securities, which continued to dominate
the capital market throughout the century. They also turned favourably
towards the expanding insurance companies, although these latter
confined their operations in the main to the London area. It was the
stock jobbers who felt the full venom of public abuse after the crisis,
and eventually their wings were clipped by Barnard's Act of 1734 which
was expressly intended 'to prevent the infamous practice of stock-
jobbing'. That Act however soon became very much a dead letter and so
was belatedly repealed in 1867, although in the same year Leeman's Act
was passed to make sure that the legal prohibition against option
dealing in bank shares, which had never been a dead letter, was firmly
maintained. Friendly Societies — the poor man's combined savings bank
and insurance company - grew steadily more important throughout the
century, even though they were in the eyes of the Bubble Act of doubtful
legality, as were the early building societies, at least until the Friendly
Societies Act was passed in 1793 in an effort to clarify the situation and
give some limited protection to members. Another method commonly
used to circumvent the Bubble Act was to arrange for groups of
persons, sometimes even numbering hundreds, to be represented by
what we would now call a 'front' of prestigious and highly respected
persons who acted as 'trustees' for the business or organization - a
method later to become very popular with the savings banks. By such
means business carried out by partnerships, associations, trustees,
societies, unions and other such groupings in course of time 'had
become almost as liquid as it was with the incorporated companies'
(Dubois 1938, 38). Nevertheless the vigilance of the Bank of England
saw to it that banks at any rate were strictly limited to a maximum
number of six partners - except in Scotland where financial institutions
developed upon interestingly different lines.
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THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
Financial developments in Scotland, 1695-1789
A series of innovatory financial developments in Scotland in the century
or so following the establishment of the Bank of Scotland in 1695 were
to have far-reaching effects not only on the economy of that country but
also had a significant influence on monetary theory and policy and on
practical banking habits in England and Wales and abroad.
Consequently Scottish monetary history, interesting enough in itself, is
of far greater importance than might at first glance be supposed.
Scotland was the only region of Britain, outside the London area, where
indigenous banking had made substantial progress by the middle of the
eighteenth century. If we begin by looking at the state of the currency,
this was in a much worse condition in general even when compared
with the pre-1696 coinage in England and Wales, so that when banking
grew so as to supplement the metallic currency, the benefits were more
immediately obvious. Furthermore Scotland, much poorer than
England, could not afford the luxury of relying on a gold currency to
the extent that was becoming common south of the border. As in
England, the first traders to carry on banking business in places like
Berwick and Edinburgh were the Italian 'Lombards', but apart from
teaching some familiarity with the discounting of bills of exchange,
little else was learned.
Not only were the bankers foreign, so was most of the better-quality
coinage, what little there was of it. As C. H. Robertson shows in her
study of 'Pre-banking financial arrangements in Scotland' (1988),
The available currency was to a considerable degree made up of coins of the
countries with which it traded and of the native coins of which there were
comparatively few in circulation . . . Gold and silver were extremely scarce
and most payments were made in the clipped, worn, crudely made discs
which passed under the name of coin of the realm.
The attempt by James following the union of the Crowns in 1603 to
unify the coinage failed dismally, despite the minting of the gold 'unite'.
The scarcity of gold in Scotland also prevented the Edinburgh
goldsmiths from developing into banking business in imitation of the
London goldsmiths (though John Law's father, an Edinburgh
goldsmith, did manage to pursue some very elementary credit business
roughly akin to banking). Clearly Scotland would have much to gain
from supplementing its lamentable metallic currency by adopting paper
credit and payment systems such as those which had grown up in
London during the seventeenth century and which had culminated in
the establishment of the Bank of England as advocated by William
THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
273
Paterson. This example immediately fired the imagination of a number
of influential London Scots, who, led by Thomas Deans and by the
Englishman John Holland, got together to set up a public Bank for
Scotland superficially similar to the Bank of England.
A rival to the planned Bank of Scotland appeared on the scene
immediately, led by none other than William Paterson, who far from
being the 'founder of the Bank of Scotland' as a number of writers
wrongly persist in claiming, strongly opposed the bank, fearing that
investors' money would be diverted from the much more grandiose
plans for his Darien project, a sort of Scottish East India Company. The
Act which established the 'Company of Scotland trading to Africa and
the Indies' was passed successfully by the Scottish Parliament on 26
June 1695. Although its main purpose was to set up a colonial entrepot
at Darien on the isthmus of Panama, strategically seen as 'the key to the
universe', Paterson was also keen to see it carrying on a banking
business. In the event, the Darien venture turned out to be an
unmitigated disaster involving the colonists in much disease and many
deaths and the investors in heavy losses. Nevertheless it was to exert
considerable influence on the constitutional and financial history of
Scotland. Despite the fierce opposition of Paterson and his friends, the
Act authorizing the Bank of Scotland was passed by the Scottish
Parliament on 17 July 1695. A new era in Scottish economic history had
dawned.
Thomas Deans and his fellow promoters in Edinburgh and London
asked John Holland, a private banker and merchant in London, to draw
up the proposal for the bank's charter as quickly as possible. Thus,
apart from the Bank of England being the obvious and most recent
model, the urgent need for haste to tap a limited market for capital was
one of the main reasons for the similarity between the charters of the
two banks. The capital seemed nominally the same, at £1,200,000
Scots, which of course was merely £100,000 sterling. Only £10,000
sterling was called for the initial subscription and the shareholders
enjoyed limited liability up to the total subscription. Like the Bank of
England, the Bank of Scotland and the Darien Company sought to
attract foreign subscribers, the latter two companies going to the extent
of allowing such subscribers to be granted Scottish nationality.
Nevertheless, to prevent take-over, a minimum of two-thirds of the
shares in both companies had to be held by persons resident in
Scotland. Again like the Bank of England, the Bank of Scotland was
forbidden to indulge in trade (though the Darien Company was allowed
to carry on banking business as well as trading). The Bank of Scotland
was, just like the Bank of England, not allowed to lend to the monarch
274
THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
without the consent of Parliament, but, different from the case of the
Bank of England, this also applied to its initial capital subscription. Yet,
quite apart from its much smaller size, there were a number of
important differences between the two banks which grew to influence in
important aspects the monetary practices of the two countries just
when, constitutionally, they were becoming more united.
Whereas the Bank of England had to struggle through its formative
years until 1709 when its monopoly of joint-stock banking was made
explicit (but was thereafter extended on or before expiry well into the
nineteenth century), the Bank of Scotland was expressly given a
monopoly for twenty-one years, but this was not extended afterwards.
Furthermore, whereas bank partnerships were limited in England to a
maximum of six, there was no such maximum limit to co-partnery
under the distinctly different Scottish legal system. The much greater
freedom for joint-stock and larger-partnership banks was to be a vital
feature in the role played by banks in the economic development of
England and Scotland, with Scotland becoming eventually the model to
be copied. The Bank of Scotland was not involved, as was the Bank of
England right from its commencement, in acting as the major holder
and manager of the national debt. As Professor Checkland, the eminent
historian of Scottish banking explains, the Bank of Scotland has many
claims to uniqueness, being 'the first instance in Europe, and perhaps
the world, of a joint-stock bank formed by private persons for the
express purpose of making a trade of banking, solely dependent on
private capital . . . wholly unconnected with the state' (1975, 23).
Although the Bank of Scotland's monopoly as the 'only distinct
Company or Bank' was almost immediately challenged by the Darien
Company, the bank received a further special privilege in that its profits
were not to be subject to tax for its first twenty-one years. Under its first
Governor, John Holland, it began to issue notes - significantly
denominated in pounds sterling - for £100, £50 and £10, thus
increasing uniformity of accounting between the two countries,
although when it began issuing smaller notes in 1716 valued at £1
sterling these still carried the inscription 'Twelve pounds Scots'.
Hardly had the bank begun issuing notes than the Darien Company
tried to bring about its downfall by suddenly presenting for payment in
specie a very large quantity of notes which it had previously amassed
with this purpose in mind. By promptly calling on its subscribers for a
temporary loan and by economizing by closing its recently, and
prematurely, opened branches at Aberdeen, Dundee, Glasgow and
Montrose, the bank weathered this first serious challenge to its
existence during 1696 and the early part of 1697. During 1704 the
THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
275
effects of the drain of specie from Britain to pay for Marlborough's
army was intensified in Scotland because of the huge losses suffered by
the Darien Company. In December 1704 the bank suffered another run
and had to suspend payment, paying interest on its suspended notes
until repayment became possible in May 1705 following a second
temporary call for capital from its subscribers. In this crisis the bank
availed itself of the 'Optional Clause' by which banknotes could be paid
either on demand or up to six months later provided interest was paid
as compensation.
By March 1700, after the battered remnants of its three disastrous
expeditions to Panama finally withdrew, the Darien Company virtually
ceased to exist. The Scottish subscribers had lost the whole of their
investment of £153,000 sterling, while in addition the company owed
around £80,000 to hard-pressed creditors, almost all of whom were
Scots. The potential English subscribers were fortunately saved the
£300,000 they had originally promised, because legal proceedings
brought by supporters of the East India Company showed that the
latter's existing monopoly would have been infringed. This dismal end
to the Darien scheme not only removed the main rival to the Bank of
Scotland but also put paid to any lingering ambition Scotland may have
had of independently establishing its own colonial trading posts, or
even being allowed, in that mercantilist age, to partake substantially in
exotic international trade, except with the acquiescence of its larger
southern partner. Consequently the Darien fiasco became one of the
important factors leading towards the Act of Union of 1707, which laid
down that trade was to be 'free and equal throughout Great Britain and
its dominions'.
The financial clauses of the Act laid down that Scotland, in return for
losing its own customs and excise and other taxes and for assuming a
share of responsibility for the English national debt, was to receive in
compensation an 'Equivalent' of £398,085. 105. sterling, plus a further
sum, the Arising Equivalent', being the expected increased yields to
Scotland from 1707 to 1714 of the new uniform fiscal system combined
with the increased volume of trade stimulated by the fact of Union.
Perversely, however, the yields in the initial years turned down - an early
example of the frustrating effect of the notorious 'J-curve' on the
direction and extent of eventually beneficial adjustments in
international trade.
The largest claim on the Equivalent Funds was that by the
shareholders and creditors of the Darien Company, which amounted to
£232,884. Almost as much, some £200,000 was required to pay off
holders of public debt. Thirty thousand pounds was allocated to pay
276
THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
for the administrative costs of carrying through the Union, while
industrial development funds were set up to assist the fishing, textile
and other industries over the seven years from 1707 to 1714. The Act of
Union further decreed that 'from and after the Union the coin shall be
of the same standard and value throughout the United Kingdom', and
to this end some £50,000 was allocated to cover the costs of recoinage.
The gap in the currency during the three years of recoinage was largely
met by the issue of notes by the Bank of Scotland, which acted as
government agent in the process. After the recoinage was completed the
Edinburgh mint was finally closed down on 4 August 1710. The Bank of
Scotland and its notes had most opportunely arrived on the scene in
good time to supplement the coinage, the total value of which was then
given as £411,117 sterling.
Only the most influential or otherwise fortunate of creditors with
claims on the Equivalent were paid in cash in Scotland. Some were paid
or credited in Bank of England notes, Exchequer bills and similar short-
term paper, whereas the majority had to accept long-term debentures
and so had to suffer a capital loss if they chose to discount these, as a
number of desperate Scottish holders felt forced to do, with English
holders via the London money market. Thus by 1719 as much as
£170,000 or 68 per cent of the total of £248,550 Equivalent debentures
were held in London (Checkland 1975). There was thus double pressure
for repayment, or for some other means of recompense, to the
increasingly impatient holders of these debentures. Strangely, in this
roundabout manner, Scotland came to acquire its second public bank,
arising phoenix-like out of the long-dead ashes of the Darien scheme.
During the 1715 Rebellion the Bank of Scotland was felt to have been
far too openly favourable to the Stuart cause, a fact pressed home by
those who wished to establish a rival bank, chief among whom were the
Equivalent debenture holders, who had meanwhile formed themselves
into the Equivalent Company purposely to improve their chances of
gaining such privileges. As a belated result, on 31 May 1727, the
Equivalent Company was incorporated by royal charter as the 'Royal
Bank of Scotland' with an authorized capital of £111,347 sterling. As
with the case of the Bank of England, the holders of public debt had
managed to persuade the government to allow them to form a joint-
stock bank, an aptly Royal rival to 'the Old Bank'.
The Royal Bank of Scotland's most important claim to a place in
banking history stems from its innovatory 'cash-credit' system from
which in due course the simple, effective and flexible 'overdraft' was to
emerge. If an applicant for a loan, e.g. a newcomer, unknown to the
bank, could produce two or more guarantors of good standing, a 'cash-
THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
277
credit' could then be opened in the applicant's favour to draw cash
(generally notes) as required, interest being payable only on the amount
so withdrawn. Because of the strong competition between the Scottish
banks, this most useful of lending practices soon spread throughout
Scotland, and duly modified, in course of time was copied by the
English banks. Thus the extension of note issue and the development of
business activity grew hand in hand; though naturally the pace diverged
from time to time.
A third public bank - though not at first so called - came into being
when the British Linen Company was granted a royal charter on 5 July
1746 with an authorized capital of £100,000 and empowered to 'do
everything that may conduce to the promoting of the linen
manufacture'. This came to include financing the putting-out system by
paying for produce with its own notes, discounting bills of exchange
and carrying on a number of other banking practices. In 1763 it gave up
linen manufacture to concentrate on banking: 'the only British bank to
be formed on the basis of an industrial charter' (Checkland 1975, 96).
As well as these three publicly chartered banks, a considerable
number of banking institutions of varied kinds were setting themselves
up in all the main towns of Scotland, so that by 1772 some thirty-one
banks were in operation covering with their branches and agencies most
of the country. Special mention should be made of the emergence of the
Ship and the Arms banks formed in hitherto neglected Glasgow in 1749
and 1750 respectively, deriving their popular names from the designs on
their notes. Both had developed out of 'agents' of the two old
Edinburgh banks, the Ship being promoted by agents of the Bank of
Scotland, while the Arms Bank was promoted by former agents of the
Royal Bank. The 'agency' system was another distinctive feature of
Scottish banking, whereby a small sub-branch could discreetly and
most economically be set up in part of the premises of some other
prospering business e.g. a draper's shop, or a solicitor's office, and if it
proved itself a success, could be hived off into a full branch. This was a
most cheap and well-tried way of setting up branches, and by its means
Scotland became the first in the world to establish an almost
nationwide branch banking system.
Two other distinctive features of Scottish banking deserve
examination, namely the importance of small notes in the currency and
secondly the early legal confirmation in Scotland of the principle of
'free banking', by which was meant a steadfast refusal to allow the two
chartered banks a monopoly of banking, especially with regard to the
essential function of note issue. During the 1750s and 1760s a veritable
small-note mania had broken out in Scotland with notes as small as 55.
278
THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
and even Is. being common and being commonly issued by non-
banking firms of little standing. In order to protect themselves, the
Bank of Scotland and the Royal Bank of Scotland campaigned with
considerable support to be granted a monopoly of note issue so as to
secure the integrity of the note issue in general. In opposition stood the
smaller banks and an important section of public opinion in favour of
the practice of free trade. The result is to be seen in the Banking Act of
1765 'to prevent the inconveniences arising from the present method of
issuing notes and bills by the banks, banking companies and bankers in
that part of Great Britain called Scotland'. First it forbade the issue of
notes of less than 20.?. sterling. Secondly it forbade the use of the
optional clause, so that notes had to be payable on demand, and it
strengthened the legal position of note holders claiming immediate
payment. But equally important was its determination to allow
freedom, within the above limits of note size and immediate payment,
for ^//'banks, banking companies and bankers' to issue notes (then and
for a century or more to come, seen to be the essential mark of being a
bank). In contrast stood the situation in England where the Bank of
England's monopoly was reconfirmed and the maximum six-partner
rule was strictly adhered to. Furthermore the minimum note permitted
in England and Wales was for £5, and in practice few for less than £10
were commonly issued. Thus banknotes grew to supplement the
currency of the general public to a much smaller extent in England
when compared to contemporary Scotland.
Any complacency that the Scottish Bank Act of 1765 had removed
the dangers of excess note issue was however rudely shattered by the
bank crisis of 1772, a financial disaster 'comparable to the collapse of
the Darien Company' (Rait 1930, 164). In 1769 the Ayr Bank was
founded by Douglas, Heron and Co. with the extensive backing of a
number of very rich landowners such as the Duke of Queensberry and
the Duke of Buccleuch, patron of Adam Smith. The Ayr Bank was of
unlimited liability, relying on the fortunes of its backers, so that it
became in practice the private embodiment of the 'land bank' principle,
with its notes directly supported by landed wealth. The Ayr Bank was
also a sort of public protest against the over-cautious attitude of the
Edinburgh-based banks and their tardiness in forming branches. It
quickly built up some half a dozen branches, carried on a large amount
of business with Anglo-Scots in London and pushed out its circulation
of notes by means of aggressive banking to around £200,000, a total
much exceeding the combined circulation of the Bank of Scotland and
the Royal. The failure of one of its main London customers, a newly
established private banking firm of Neale, James, Fordyce and Downe
THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
279
in June 1772, quickly brought down the Ayr Bank and with it some
thirteen private bankers in Edinburgh. Once again the land bank
principle exploded itself through excessive speculation and too rapid a
rate of lending via note issue. However, in contrast to Rait's extremely
gloomy view given above, Professor Checkland shows that the failures
of 1772 did no long-lasting harm to the development of Scottish
banking. It did however confirm the old banks in the Tightness of their
more stolid traditional conservative approach to the principles and
practices of sound banking. Whether this was at the cost of also slowing
down the growth of the economy remains an open question.
The same Parliament that had set up the Darien Company and the
Bank of Scotland also passed in 1696 an 'Act for the Settling of Schools'
in every parish. The resultant high level of literacy, unusual for any
country at that time, supplied bankers in Scotland and abroad with a
steady and reliable stream of cheap, juvenile clerks, who played a not
unimportant role in the spread of Scottish banking practices. A more
notorious 'export' was John Law, who, having failed to get the Scottish
Parliament in 1705 to adopt his aggressive land bank concept,
emigrated to France in 1714 and successfully persuaded the Duke of
Orleans to set up such a bank which helped to drive the speculative
excesses of the 'Mississippi Mania' in 1719. More worthy exports may
be seen in the two prestigious London banks of Coutts and of
Drummonds, and of the House of Hope in Holland, all well established
by the middle of the eighteenth century, by which time Scotland had
developed one of the most advanced banking systems in the world.
The money supply and the constitution
The recoinages of 1696 in England and of 1707 in Scotland enable fairly
accurate estimates to be made of the total of the traditional, metallic
circulation of the currencies of the two countries. In addition, various
estimates of less certain value have been made by writers like Davenant
and Adam Smith of the total of supplementary forms of paper money.
Taken together they provide a rough guide to the total money supply,
and more importantly to the relative significance of precious metal
coinage as compared with paper money. The estimates, by ignoring
copper money and metal tokens, probably understate to a minor degree
the continuing importance of metallic currency, but when every
allowance is made, the main fact stands out: already by the beginning of
the eighteenth century paper forms of money exceeded metallic money
in total in England and Wales, and by the middle of the century, paper
money considerably exceeded specie money in Scotland also. Table 6.2
280
THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
is based on Davenant's 1698 estimate of the total money supply in
England and Wales. (See Horsefield 1960, 256).
Table 6.2 Davenant's estimate of the money supply in 1698.
£ million
as % ofe.
a. Silver coins
5.6
21.1
b. Gold coins
6.0
22.5
c. Total coins in circulation
11.6
43.6
d. Tallies, banknotes, bills etc.
15.0
56.4
e. Total of coins plus liquid paper
26.6
100.0
f. Land securities i.e. mortgages
20.0
75.2
Although the land market had become very active in Davenant's
time, it would be stretching matters too far to include mortgages in
even the widest definition of the money supply. Indeed, elsewhere in his
writing Davenant gives the proportion of assignable paper to coinage as
5:4, that is similar to that given in the table above, excluding mortgages.
In any event it is clear that Davenant already saw coins as being less in
total than the most liquid forms of paper money.
The situation in Scotland, though initially more primitive, was soon
to point even more decisively in the direction of the superiority of
paper. As we have seen, some £411,117. lCV. of silver was brought to the
mint in 1707 to be recoined. Adam Smith believed that the value of the
gold in circulation was rather more than that of silver so that, making
some allowance for hoarded silver but again excluding copper and
tokens, the total metallic circulation in 1707 was 'around £1 million'.
By 1776 Smith reckoned that bank money had grown to be so
important that of the current total circulation of £2 million 'that part
which consists of gold and silver most probably does not amount to half
a million'. He claimed that 'silver very seldom appears except in the
change of a twenty-shilling bank note and gold still seldomer'. Smith
was also in no doubt that the banks could claim a large part of the
credit for the enormous expansion in the growth of trade and industry
in Scotland between 1707 and 1776. By that time banknote penetration
and bank density (the number of bank ofices per 10,000 of the
population) were much higher in Scotland than in England, although
the convertibility of notes throughout the kingdom rested ultimately on
the gold reserves of the Bank of England. The immediate security of the
notes rested upon prudential management reinforced occasionally by
the harsh discipline of bankruptcy for the gross overissuer, like the
Bank of Ayr.
THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
281
The fact that more than half of the total money supply was now
being created, not by the mint under the dictate of the monarch, but
rather by the London money market and the provincial bankers gave
rise to the most profound constitutional consequences. First, in order to
carry out his much more burdensome civil and military duties, the
monarch, after a painful but vain struggle, had been forced to call
parliaments annually. Secondly because of the state's need to
supplement taxes regularly and substantially with various forms of
short-, medium- and long-term borrowing, the state had been forced to
take into account the views and interests of the moneyed classes and the
nature of the institutions which its borrowing had very largely brought
into being. The national debt not only created the Bank of England but
also virtually created the London money and capital markets in
recognizably modern form long before an equity market in industrial
shares became of importance.
Provided that the government's general policy was acceptable in the
City, the government's sources of finance, though no longer directly
under its control, had been enormously increased. Trevelyan's
traditional view that 'the financial system that arose after the
Revolution was the key to the power of England in the eighteenth and
nineteenth centuries' (1938, 1797) is strongly supported by modern
research. Thus P. G. M. Dickson in his detailed study of the
development of public credit from 1688 to 1756 shows how these fiscal
changes in stimulating the growth of the London money and capital
markets financed external imperialism as well as internal economic
growth. The changes 'were rapid enough and important enough to
deserve the name of "the Financial Revolution'" (Dickson 1967, 12).
The financial and constitutional revolutions were thus closely and
causally intertwined.
Not only had the money supply been elastically increased in total
amount, but in addition the drastic reduction in interest rates, which
allowed the government to borrow at around 4 per cent in the mid-
eighteenth century compared with real rates of 12 per cent or more in
the previous century, greatly increased the liquidity of the whole range
of Exchequer bills, bills of exchange and other near-money substitutes.
Cheap, plentiful and yet generally sound money provided a double
blessing - for the economy as a whole as well as for the Treasury.
Another aspect of the financial revolution has in general been
overlooked. It was not simply that the monarch had to borrow that
limited his power. When paper money began to exceed metallic money
the power of the royal purse became thereafter permanently, irreversibly
and progressively diluted. The Royal Mint had always been a main
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THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
source as well as a symbol of royal power. Money creation had always
been the undoubted and exclusive prerogative of the king. As recently as
1630 Charles I had shown how to gain independence of Parliament, at
least for a time, by bringing Spanish bullion to his mint. But those days
were gone for ever as soon as money could be created independently of
the monarch, and even of the monarch as advised by his ministers. The
symbol was still gold, but the substance was paper; and much of
the real financial and political power had been silently transferred from
the Tower to the City and beyond.
No longer either was the nation's money created in the single centre
of London, for although London's money market was to remain the
predominant source of paper money, the growth of banks throughout
the country diffused money creation regionally. Furthermore whereas
the supply of minted money was arbitrarily and centrally decided and
at a predetermined, definite amount, bank money in contrast arose
spontaneously and flexibly, but to a total amount not known in
advance, in accordance with the vague but insistent demands of local
trade and business. Again whereas, except for export drains and the
occasional recoinage, metallic currency was downwardly inflexible,
paper money was easily adjustable in both directions.
For the first time in history money was being substantially created,
not ostentatiously and visibly by the sovereign power, but mundanely by
market forces so vividly and aptly described by Adam Smith as the
'invisible hand'. From the days of the Greek and Roman empires, as we
saw in chapter 3, coinage had been a major instrument of state policy
and of far-reaching propaganda. With the coming of bankers' notes no
longer was the head of state the sole or main source of money. The aura
of monarchy was removed from money, which was now not the creation
of the ruler but of the humblest of his subjects. Ordinary people,
'pedlars turned merchants', drovers of cattle, innkeepers, iron masters,
linen makers, shopkeepers, indeed almost any Tom, Dick or Harry
could now share the royal prerogative. This was an unconscious,
unplanned and still underestimated transfer of constitutional
sovereignty; a partial financial democratization that preceded and
facilitated the advent of political democracy.
In conclusion, it is clear that the century or so after 1640 is of quite
fundamental importance in the development of a modern financial
system. Before the period, modern banking was unknown in Britain;
after it, Britain led the world in financial, agricultural and industrial
development. It had taken many centuries to establish the rules of
metallic money creation. The rules by which the optimum amount
of paper money should be decided required a long period of
THE BIRTH AND EARLY GROWTH OF BRITISH BANKING, 1640-1789
283
experimentation and legislation to supplement the internal disciplines
of bank management and the harsher lessons of bankruptcy. It required
also the growth of a central banking system of control linked to the
heavy anchor of a gold standard. This was to be the path of monetary
development in the next period from 1789 to 1914.
7
The Ascendancy of Sterling,
1789-1914
Gold versus paper . . . finding a successful compromise
Although it is quite true that economic history, unlike political history,
has no abrupt turning-points, yet monetary, financial and fiscal history
share with political history certain decisive dates which mark changes
in policy, and share also with economic history the gradual evolution of
the factors which help to bring about those more abrupt changes in
policy. Thus, as all the world's schoolchildren know, the French
Revolution began on 14 July 1789; but many esoteric and controversial
volumes have been written concerning when the industrial revolution
started. All however agree that the world's first industrial revolution
took place in Britain and was in full swing during the French
revolutionary period with mutually interacting effects, not least with
regard to substantial changes in gold, silver and copper currency,
banknotes and the national debt. Consequently the year 1789 may be
taken, necessarily somewhat arbitrarily, as our approximate starting
point for the monetary history of the nineteenth century. There is much
less room for doubt concerning the century's naturally convenient
terminating date. The outbreak of the First World War on 4 August
1914 marks the virtual end of a uniquely great monetary era during
which Britain had evolved a universally admired gold standard system
of national and international payments, when sterling's prestige reached
its zenith and when the City of London's position in the world's money
and capital markets was unrivalled. The following chapter traces the
salient features of this historic development.
We have seen that the world's first coins were made of gold around
700 BC and that a number of Greek city-states established their own
THE ASCENDANCY OF STERLING, 1789-1914
285
forms of 'gold standard' which concept was extended empire-wide by
Alexander and later by Roman and Byzantine emperors. The Italian
cities, led by Florence in 1252, revived the popularity of gold coinage in
medieval Europe, imitated in England very briefly, as a knee-jerk
reaction as early as 1257, but more regularly from the mid-fourteenth
century. Even so, despite such a long experience, the situation at the
beginning of the nineteenth century was that no modern state had
developed what could fairly be called a gold standard system. Officially
Britain was still on the sterling silver standard that had been in
existence for many centuries. Similarly, though certain forms of paper
credit had been in existence in the ancient world, though bills of
exchange had been in fairly common use in Europe for over 400 years,
and though banknotes had been popular in London since the mid-
seventeenth century, yet, at the beginning of the nineteenth century no
proper system existed for controlling the flood of notes issuing from a
motley collection of many hundreds of banks which were springing up
over most parts of Britain. Needless to say, no country had by then
devised an effective working link between a high-quality gold coinage
on the one hand and a controlled yet sufficiently elastic supply of paper
money on the other hand. The British monetary authorities, after
starting the century with no sign that they knew the answer to this
problem, then had to turn their energies to financing a long and
burdensome war as a result of which the pound became depreciated and
inconvertible for the first quarter of the century, and finally took a
series of well-studied and deliberate steps between 1816 and 1844 to
solve the problem. First, gold was at last officially made the standard of
value and then the ground rules were laid down by which a non-
inflationary and yet sufficiently elastic supply of paper money could be
practically guaranteed. Consequently, by the middle of the century
most of the problems which had led to a recurrence of internal drains of
gold from the Bank of England's reserves and from the reserves of the
unit banks had at last been overcome.
The second half of the century was to demonstrate how the Bank of
England, with astonishingly low reserves, could also successfully deal
with potentially very heavy external drains and with import surges of
gold, while fully maintaining the convertibility of the pound. During
the course of the century the total supply of gold increased
substantially, but in irregular spurts; yet it could not keep pace with the
steady increase in population and the increase in the average standard
of living. The more manageably elastic part of the money supply was
provided by the banking system, and was made available, thanks to the
links maintained with gold, in a manner that kept the general level of
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THE ASCENDANCY OF STERLING, 1789-1914
prices remarkably steady, in a most flattering contrast with the
'managed moneys' of the twentieth century. The authorities,
consciously seeking for an 'automatic' monetary system, had managed
to establish, in an open economy sharing the risks and benefits of free
trade, a most successful compromise between the disciplines of gold
and the incentives of banking. The British empire may well have been
built up in a fit of absent-mindedness, but the gold standard which
helped to sustain it was by contrast the result of consciously learning
from the experience of practical bankers, those who failed as well as
those who prospered, and from the willingness of the authorities to
accept the wisdom and reject the folly of countless parliamentary
debates, committees, books, journals, pamphlets and papers with
which the period abounded.
Of course a certain amount of luck was involved in the shape of a
spate of gold discoveries in far distant parts of the world, but the British
monetary system was so devised that it was able to take full advantage
of these new sources of supply. The continents were being more closely
connected by steamships, telegraph and cable - and by the final golden
fling of the Clippers. Meanwhile the interiors of these continents were
being opened up by the railways, 'England's gift horse to the world',
most of such development being heavily financed by British capital and
the bill on London. A successful monetary system supported a
successful economy - or so it was confidently thought. We shall have to
consider in some detail later whether, and if so to what extent, the train
of causation was the other way round. We turn now from this first
glimpse at the successful compromise which linked paper to gold and
which formed the background to the picture of monetary development
in the century as a whole, to a more detailed analysis of the new
banking system which created most of the increased money supply, and
then turn to examine the state of the metallic currency and the
importance of the belated recognition that gold had finally replaced
silver as the official standard of value.
Country banking and the industrial revolution to 1826
Professor Pressnell's authoritative and comprehensive research on this
subject (1956) has confirmed Edmund Burke's contemporary view that
by the middle of the eighteenth century, which is approximately the
traditional starting date of the industrial revolution, barely a dozen
banking houses existed in England and Wales outside the London area.
Sir John Clapham also gives good reason for thinking that probably not
more than half a dozen were regularly constituted banks worthy of the
THE ASCENDANCY OF STERLING, 1789-1914
287
name (1970). The earliest was that established in 1658 by Thomas Smith,
a draper in Nottingham. James Wood of Bristol began issuing notes in
1716 which were accepted eagerly by businessmen in that area, the success
of which some years later led to a similar bank being set up in Gloucester.
The Gurney family of Norwich had entered banking by about 1750, by
which time there is evidence of a second bank in Bristol and another in
Stafford. After 1750 the pace noticeably quickened, so that by 1775,
depending on how strictly one uses the term 'bank', there were between
100 and 150. One cannot be precise because unit banking, by its nature,
and even more especially in its infancy, is a risky business; the numbers
fluctuated, on a rising trend, from slump to boom. Furthermore banks
were not required to have licences to issue notes before 1808, and not
every bank issued notes, though the majority of country banks did so.
Growth became really strong from the 1780s, rising from 119 in 1784 to
280 by 1793, while the number of licensed banks in the peak year of 1810
was 783, which together with a reasonable allowance for unlicensed
banks gives a total of over 800. This increased momentum of bank
formation lends support to Rostow's view that between 1783 and 1802
Britain experienced the world's first 'take-off into self-sustaining growth'
(1971), while the wide geographic and industrial spread of such banks
would favour the 'broad push' rather than the narrow 'leading sector'
view of the basic economic causes of the industrial revolution (Hartwell
1971).
The fascinating variety of the origins of country banking may be
gleaned from the following list of some of the main industries or
occupations in which their founding partners were engaged when they
first became bankers: army agents, agents for packet-boats, and attorneys;
barristers, brewers, butchers and button-makers; chandlers, church
treasurers, coal factors, colliery owners, copper miners, corn merchants
and cotton manufacturers; drovers and drapers; engineers and excisemen;
farmers of all sorts; gun makers, grocers and goldsmiths (the latter not as
prominent as in London); haberdashers, hatters, hop-growers, hosiery
makers and hemp merchants; innkeepers, iron ore dealers, iron smelters
and owners of iron foundries; jewellers and manufacturers of japan-ware;
lace makers, leather merchants, linen merchants and of course land
owners; mercers, millers and naturally money lenders; pewter makers;
revenue collectors; scriveners, ship-owners, shoemakers, snuff-box
makers, stockbreeders, solicitors and sword makers; tanners, tea
merchants, tin miners, timber merchants and tobacco dealers; varnishers;
weavers, wine merchants and wool merchants, etc.
Perhaps the strangest of such origins is that of Fryer's Bank in
Wolverhampton, formed when an oak chest full of French gold coins
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THE ASCENDANCY OF STERLING, 1789-1914
left behind by the followers of Bonnie Prince Charlie in 1745, was
eventually opened by Richard Fryer in 1807 to provide the initial capital
used for investing in what by then had become one of the most
fashionable of ventures, banking (Sayers 1957). However diverse the
origins might have been, Pressnell shows that it was industrialists and
transmitters of funds who were the most common sources of bank
partnerships, together with lawyers, who, like the London scriveners,
had long been accustomed to handling other people's money.
Thus almost all the early country banks grew up as a by-product of
some other main activity. This mixed apprenticeship not only further
explains the minor point concerning the inexact nature of early banking
statistics but also has a number of much more important economic
aspects. For one thing it made for easy trial and error, giving the
potential banker an opportunity to test the water before plunging in.
Typical of such early tentative ventures is that of Birmingham's second
bank, founded by Robert Coales around 1770, described in that year's
Business Directory as 'Sword-Cutler and Merchant' without even
mentioning his banking. By 1789 he was known as 'Banker and Sword-
Cutler', and by 1797 simply as 'Banker'. This process was typical of
country banking in general, for gradually the non-banking business
which subsidized the fledgling banking activities was separated, sold off
or just dropped, the country banks emerging as specialized financial
institutions all the more able to appreciate the needs of other business
customers through having themselves been closely involved in such
affairs. A further generally overlooked advantage of mixed parentage
sprang from the fact that being a banker, even in the small way typical
of the early starters, gave the partners a strategic overview of the local
business scene, clearly indicating opportunities that might otherwise
have been missed. For the early bank partners commonly had their
fingers in half a dozen business pies, not always confined to their own
localities. Having a banker as partner not only assured the other
concerns of priority in banking services but also enabled bank partners
to share in partnerships elsewhere, especially since the demands on the
time and financial resources of the entrepreneur made by running the
early small-unit, local banks were not too severe. The part-time banker
is therefore frequently seen setting up businesses, including other banks,
elsewhere, a feature which helps to explain why, after the initial lag of a
hundred years behind London, country banking, once it caught on,
spread so rapidly and so widely. A lot of banking eggs were being
hatched in a large number of small nests, the geographic and industrial
spread acting as a macro-economic insurance policy for a basically
risky industry.
THE ASCENDANCY OF STERLING, 1789-1914
289
One of the main reasons for setting up a bank was the simple one of
securing on a regular and reliable basis the wherewithal to pay for
goods and services, given the unreliability of supply and the very poor
quality of most of the official metallic money supply and the limited
geographic coverage, lack of knowledge of or faith in the notes of the
Bank of England, especially during the periods when its notes were
issued only in large denominations. From among the many
industrialists who came into banking through finding it necessary to
produce their own coins or notes or both, we may take as an example
the Wilkinsons, iron masters and colliery owners, originally of Bilston,
then known as 'the largest village in England' with a population of
6,000. They issued token coins of iron, copper and silver, and notes of
various denominations through a number of banks in which they were
partners in the Midlands and North Wales, most of which eventually
became absorbed into the Midland Bank. Of the 114 banks which had
by the 1930s been so absorbed into the Midland, some forty-one were
originally small country banks. It was the iron trade that also supplied
the greater part of the family wealth that enabled Sampson Lloyd to
join with John Taylor, a manufacturer of buttons and japanned ware, to
set up what was probably Birmingham's first proper bank in 1765. Of
the 142 banks listed by Professor Sayers as having been merged into
Lloyds by 1957 no less than 126 had been country banks. It was thus
that the industrial heartland of England gave birth to what by the 1920s
were to be the world's two biggest banks, the Midland and Lloyds
respectively. Barclays originated in the rural corn-growing area of East
Anglia where John and his brother Henry Gurney set up a banking
house in Norwich in the 1750s. This famous Quaker family, through
its relations, friends and co-religionists, spread its influence widely to
as far as Keswick and Ireland, as well as establishing in London what
was to become the largest bill-broking firm of the mid-nineteenth
century.
The role of remittance activities in banking development may be
illustrated by the drovers' banks of mid-Wales, such as the Black Ox
Bank set up by David Jones of Llandovery in 1799 with its notes aptly
depicting the Welsh Black breed of cattle. The drovers' regular and
growing trade with London's Smithfield market became a convenient
and relatively secure way of transmitting bills of exchange readily
discountable in London. Similar pastoral origins are seen in the Bank of
the Black Sheep which supplemented the short-lived Banc y Llong or
the Ship Bank, again so called from the designs on its notes, which had
been formed in Aberystwyth around 1762 when, significantly, a new
customs office opened in the town (Crick and Wadsworth 1936).
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THE ASCENDANCY OF STERLING, 1789-1914
Pressnell, while questioning the importance of the 'bovine paternity of
banking', yet gives a number of examples of so-called 'cattle banks' in
small market towns, such as Peacock's which was operating in Sleaford
in Lincolnshire by 1801, and cites at least one Smithfield merchant,
Joseph Pilkington, who in 1828 was known as a 'money taker and
banker'. He also suggests that the excessively large number of banks in
the East Riding of Yorkshire arose because of the needs of drovers
buying Scottish cattle. Of equal if not greater importance in helping to
give rise to country banking were the remittance activities of revenue
collectors, such as that of the Exchange Bank of Bristol set up by
Samuel Worral in 1764 and Joseph Berwick's bank formed in Worcester
in 1781. The French wars, in necessitating much greater revenues and
public money transmission, especially to pay troops stationed in
various parts of the country, also indirectly substantially stimulated the
further growth of country banking and its links with London.
Links with London were of vital importance on both the micro- and
macro-economic levels, that is for the security and profitability of the
individual bank and for the progress of the economy as a whole. Most
country banks were individual, single offices; there were very few
branches before 1800. Nevertheless they were not isolated units, but
through contacts built up in a variety of ways with London banks they
had recourse to or contributed to, as occasion demanded, the monetary
reserves centralized in the City. This enabled country banks to operate
with lower capital and reserves than would otherwise have been the
case, or, what amounts to the same thing but viewed more positively,
enabled them to issue a larger total of loans through expanding their
note issues or discounting more bills than they could have done without
such linkage. Thus the country banks, while not yet able to develop the
fully integrated system which had to await the branch banking
developments of the second half of the nineteenth century, managed to
overcome many, though not all, of the more obvious disadvantages of a
basically unit banking system. Of the 119 country banks in 1784 only
seven (or 6 per cent) had any branches at all, a situation practically
unchanged so far as the trend in branching is concerned by 1798, when
only fourteen (or 5 per cent) of the 312 banks then operating had
branches. Of the 483 banks listed by Pressnell for 1830 some 362 banks
(or 75 per cent) still had just a single office each. Of the other 121 banks
which operated branches, some sixty-six had just one branch. The total
number of offices in the branch banks, at 359, came to almost exactly
half the total of 721 bank offices then in existence. Quite exceptionally,
the firm of Gurneys, operating mostly in East Anglia, already had a
network of twenty-one branches, prematurely pointing the way to the
THE ASCENDANCY OF STERLING, 1789-1914
291
natural development of the second half of the nineteenth century
(Pressnell 1956, 127). Integration, such as it was in the heyday of
country banking, therefore, came about not through branching but
through establishing representative agencies and sometimes shared
partnerships with London banking firms which in turn had direct
access to the Bank of England for its notes and bullion. In this way the
excess savings of the City and of the rural areas via the City were made
available to the country banks in the industrial areas where demand for
funds generally exceeded local supplies.
Although the existence of such links had long been recognized by
economic historians, the importance of this linkage has not usually
been sufficiently appreciated because of a general failure to realize the
value of working capital - as opposed to the traditional emphasis on
fixed capital — in business investment in the early and mainstream days
of the industrial revolution. When Britain became the world's first
workshop, it was the small workshop, the small mine, the small bank
and so on, all needing very modest amounts of fixed but large amounts
of working capital, which in the main brought about this economic
transformation. This is not to decry the importance of large factories,
mines, canals, ships and major inventions such as the steam engine,
which required large amounts of equity capital, but rather to give more
needed emphasis to the countless small improvements all around the
country, surrounding the more spectacular developments, which
together enabled the growth of national output regularly to exceed the
rise in population.
Early banks were very properly called 'houses' and the manager's
office, usually the only room, containing a clerk and a safe, was known
(and still is) as the 'parlour', reminders of how little in the way of fixed
capital was needed to set up the country bank of those days. Even the
parlour was sometimes borrowed from one of the partners so that the
initial capital could be used for till money, printing notes, the clerk's
wages and so on. As Mr R. A. Hodgson in his path-breaking study of
'The economics of English country banking' (1976) states, A few
hundred pounds would in all probability cover the outlay necessary to
fit out the establishment . . . the rest of the capital sum was available to
finance its initial activities and to open an account with a London
banker'. Because of the limitations following the passing of the Bubble
Act and the vigilance of the Bank of England in policing its monopoly,
the maximum number of partners in banks in England and Wales was
six. The dangers of unlimited liability were in addition so strong that in
fact only twenty-six of the 552 banks in 1822 had six partners; the
average was only three. Thus A. H. John, in his book on The Industrial
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THE ASCENDANCY OF STERLING, 1789-1914
Development of South Wales (1950) quotes William Crawshay, the
Merthyr iron-master as follows: 'I don't say that banking capital
partnerships may not be good, but without I was the sole controlling
manager I would not be a partner even in that of England if my whole
property was liable' as it would have been. The weakness of English as
compared with Scottish banks has already been mentioned. In 1810 the
average capital of the Scottish joint-stock banks was £50,000 compared
with the £10,000 estimated for English country banks.
Despite the irksome restrictions of the law on partnerships and the
strict policing of its monopoly privileges by the Bank of England, the
small country banks effectively supplied Britain's agriculture and
industry, in that order of magnitude, with the working capital they
required during the agricultural and industrial revolutions from about
1760 to around 1826. As Rondo Cameron shows in his study of Banking
in the Early Stages of Industrialisation (1967), only recently have
economic historians been able to judge the quantitative importance of
the various forms of capital investment. Most firms grew by reinvesting
their own profits, and only 'rarely did the representative firm invest as
much as 50 per cent of its total assets in fixed capital. Of greater
importance collectively were the liquid funds or access to credit needed
for the purchase of raw materials, the payment of wages . . . and the
extension of credit to buyers.' This the country banks were almost
ideally placed to supply. We have already noted that there was a very
close connection between banking and industrial investment with the
customary renewal of short-term loans so as to supply much of the
medium- and long-term needs of the entrepreneur. Furthermore, by
supplying businessmen with so much of their working capital, the
firms' own profits were the more fittingly available for ploughing back
into fixed capital. The close connections between banking and industry
— so markedly different from later developments in Britain — sometimes
through shared partnerships and more generally through a common
commitment to the growth of the local economy from which they all
drew their major profits, was in the main a symbiotic relationship.
Although on occasions the failure of the bank would bring down other
businesses, in which case banking was seen as a parasite, on balance
there can be no doubt that the mushroom growth of country banking
played a vital role rather than merely a passive one in stimulating the
world's first industrial revolution. Without the banks the revolution
would have been strangled in its infancy.
THE ASCENDANCY OF STERLING, 1789-1914
293
Currency, the bullionists and the inconvertible pound, 1783-1826
The state of the currency by the end of the eighteenth century was, once
again, deplorable. Sir John Craig shows that 'The mint had been
deprived of copper coinage; silver coinage was dead; and gold minting
was only undertaken on a small scale' (1953, 255). Gold coins had
however been minted at a record level in the last quarter of the century,
some £46,000,000 of gold having been minted between 1774 and 1795,
while only £68,609 worth of silver was minted between 1760 and 1816.
It was in silver and copper coins, the bread and butter of everyday life,
that the shortage was of a crippling severity. Faced with a woefully
inadequate and unreliable supply of official coinage, businessmen in the
provinces in particular were forced increasingly to improvise. There
were five main methods used to try to fill the currency gap: tokens of
metal; truck, or payment in goods; paper notes issued by company
shops and quasi-banks; the use of foreign coins, especially silver; and
eventually and by far the most effectively, as we have seen, by proper
banks, which issued bills as well as notes, and could usually draw on the
official currency, such as it was, from their London agents. Even though
the gold circulation was never allowed to deteriorate to the extent of
silver and copper, its poor state was demonstrated when Matthew
Boulton was able in 1772 to buy more than a £1,000 worth of gold coin
of the realm with a £1,000 banknote. Patchy geographical distribution
added to the difficulties arising from the overall inadequacy and the
very poor intrinsic standard of the coins in circulation.
Mr F. Stuart Jones, in his research into 'Government, currency and
country banks in England 1770-1797' (1976), records the fairly typical
struggles of Samuel Oldknow, a Lancashire cotton manufacturer, to get
enough money to pay his workforce. Relatives would send him cash
hidden in bundles of cloth; he went into the retail trade for the sole
purpose of garnering enough cash to pay the wage bill, and when that
scheme failed he was forced to ration cash payments to his workers for
eighteen months from 1792 to 1794 paying them mainly in 'Shop notes'
of one guinea down to Is. 6d. redeemable in certain company shops.
Because of its later abuses the whole of the truck system has been given
a bad name. Admittedly, at its worst it meant the arbitrary payment of
cotton workers in yards of cloth, miners in tons of coal, and so on,
together with gross exploitation through charging high prices in the
'Tommy', 'Truck' or 'Company' shops where the truck, tokens or notes
were redeemed, often at large discounts on their nominal values, the
workers losing at both ends of the scale. But there were legitimate and
honest reasons for many of the early company shops set up in industrial
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THE ASCENDANCY OF STERLING, 1789-1914
areas remote from established towns and villages, and for the issue of
tokens and notes by many desperate and helpful employers. 'So many
manufacturers were forced to adopt such measures that the first decade
of the nineteenth century witnessed the heyday of the private token
coin. When this stage was reached the government had almost
completely lost control over the metallic currency of the Kingdom' (F. S.
Jones 1976).
Token coins were not in actual practice, and with some exceptions,
illegal, provided that they were not copies of the designs on the official
coinage, in which latter case they were counterfeits carrying the direst
penalties, including death, to the manufacturer and to the user of
counterfeits. Economically all three kinds of coin performed most of
the functions of currency almost equally well, the bird in hand being
worth two in the bush; but the social consequences which frequently
included death for tendering forged notes as well as for counterfeiting,
could hardly have been greater. But genuine tokens, if one might use
such a phrase, were fair game. The first great era of token production
during the Industrial Revolution began with the issue in 1787 by the
Anglesey Copper Company, using the high-quality ore from its local
Parys mine, of a very attractive 'Druid Penny' which could be
exchanged for official coin at full value, if so desired, at any of its shops
or offices. Soon practically every town in the country was producing its
own tokens, often buying the blanks, dies and designs from
Birmingham and elsewhere. By the turn of the century the total supply
and velocity of circulation of tokens, foreign coins and other substitutes
very probably exceeded those of the official coin of the realm. A
worried government was partially relieved to hear from the Royal Mint
that the tokens were 'not illegal'; indeed some of the chief engravers of
the mint were making a good profit from selling new designs (not
official ones of course) to the free market in coinage.
Much of the token coinage was so obviously superior in appearance
to the official coinage that the government itself decided that the free
market could probably supply copper currency better than could the
Royal Mint. Consequently Matthew Boulton was given a contract in
1797, initially for just 50 tons of two-penny and one-penny pieces,
accompanied by an Act of Parliament and a Royal Proclamation to
place the legality of his new coins beyond doubt. To assist the
immediate circulation of the new money Boulton managed to obtain
early orders from bankers in Scotland as well as from the larger number
of smaller bankers in England and Wales, while the government agreed
to use the coin straight away to pay the armed forces and their suppliers
in Deptford, Greenwich, Woolwich, Chatham, Skegness, Portsmouth
THE ASCENDANCY OF STERLING, 1789-1914
295
and Southampton (Cule 1935). Boulton's partnership with James Watt
had led to the application of steam to many new forms of production at
the Soho works in Birmingham, including coinage not only for tokens
for English towns but also for the East India Company, for customers in
Newfoundland and the USA and, despite the war, for the large French
banking house of Monnerons. Two other contracts followed from the
British government for whom Boulton's Soho works minted 4,200 tons
of copper between 1797 and 1806. His 'Cartwheel' two-penny pieces,
weighing a full two ounces, as well as his smaller copper coins, were
extremely popular as soon as issued and 'the public demand for the new
pence continued to be almost insatiable' (Cule 1935). After supplying
mints embodying his new steam-powered machinery in Russia, Spain,
Denmark, Mexico and India, Boulton was employed to erect the Royal
Mint's new manufactory on Tower Hill just before his death in 1809,
the new mint being completed in 1810.
Meanwhile the desperate shortage of silver coinage continued. Old
French twelve- and twenty-four-sou pieces circulated in Britain as
sixpenny and shilling pieces. Given the inactivity of the mint, the Bank
of England itself stepped into the breach and issued silver coins, altered
in design to varying degrees, from its reserves of foreign coins. Half a
million pounds' worth of Spanish dollars issued by Charles IV were
overstamped in 1797 with a small engraving of George III and made
current at 4s. 9d. - hence the ridicule 'Two Kings' heads and not worth
a crown', and more crudely 'The head of a fool stamped on the neck of
an ass'. The issue failed because the overstamping was readily applied
unofficially to the plentiful supplies of light or base Spanish dollars.
Consequently Matthew Boulton was employed in 1804 to erase
completely the existing design on full weight Spanish coins and re-
stamp them as 'Bank of England Five Shilling Dollars', the price being
raised to 5s. 6d. in 1811. In the latter year the Bank also took the very
significant step of issuing token, i.e. light-weight as opposed to full-
bodied, silver coins for 35. and for Is. 6d. By thus appearing to usurp
the royal prerogative the Bank was considered to have given the green
light to manufacturers around the country, who in the second great era
of token production in 1811 and 1812 issued a flood of silver coins.
However, the silver currency was plainly still in a mess and most
contemporary observers realized that silver's days as the official
standard of value were over, in fact if not quite yet in legal form.
Because of the poor condition of the silver coinage its legal tender
status had already been limited to £25 by an Act of 1774, silver
payments in excess of that amount being legally acceptable by weight at
55. 2d. per ounce. The issue of silver tokens by the Bank of England was
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THE ASCENDANCY OF STERLING, 1789-1914
a further open, if belated, admission of the subsidiary role to which
silver had been reduced. Boulton's copper was limited legal tender up to
2s; there was no limit on gold, while notes, even of the Bank of England,
were not yet deemed worthy of consideration of legal tender status. But
towards the end of the war the situation was changing and much
thought was to be devoted to this question and to the best way of
establishing a sound metallic currency. The official position with regard
to banknotes swung from laissez-faire to restriction and back again. A
series of Acts, usually forced on Parliament after financial crises, first
tried to limit the use of notes through forbidding small denominations,
then was forced to allow them, and later tried again with partial success
to restrict them. In between the restrictive Acts the supply of unofficial
paper swelled to meet the growing demand in a fundamentally new way
which meant that no longer had provincial businessmen to go cap in
hand to the monarch, or to Parliament (or even to London as they had
to in previous and in later years) in order to increase the money supply.
Instead the money was being created locally, on the spot, when, where
and to the degree demanded. This most useful but unstable volume of
credit was being created 'by the needs of trade', or in modern
terminology, endogenously by the effective demands of business and not
exogenously by the central monetary authority - by the market rather
than by the Royal Mint.
As Peter Mathias shows, in his study of English Trade Tokens: The
Industrial Revolution Illustrated (1962), 'Local money gives dramatic
evidence of the state of economic life and insights into the aspirations
of the men who led it' (p. 62). When Wilkinson, the 'iron king', stamped
his own head regally on his own coinage, with his tilt-hammer and
forge pictured on the reverse, this symbolism, which appeared
exaggerated to his contemporaries and to most later historians, was in
fact much more fully justified than was apparent. It gave a true picture
of how the money supply in general, partly in metal but mostly in
paper, had become an endogenous product, being created provincially
as an essential ingredient of the world's first industrial revolution.
Taken together, the country banks and the token makers were providing
almost the whole range of currency needed and certainly the bulk of its
most elastic and responsive component. Further support of this
viewpoint is given by Stuart Jones: 'Bank deposits may have increased
the volume of currency available to entrepreneurs by considerably more
than ten-fold' and thus 'the banks, by means of their deposits alone,
were stimulating industrial expansion' and so indicating 'the
importance of re-assessing the role of banks in promoting
industrialisation' (1976, 264).
THE ASCENDANCY OF STERLING, 1789-1914
297
The second spurt of token production in 1811 and 1812 alarmed the
government, for whereas it had been willing to turn a blind eye to
copper tokens, the unofficial production of silver money seemed a
much more direct challenge to traditional monetary authority. Most
silver token producers took great care to make clear the ancillary nature
of their product. Thus the 1811 Merthyr silver token bore the
cautionary inscription 'To Facilitate Trade Change Being Scarce', while
at the other side of Britain the Ipswich Is. token of 1811 was issued 'To
Convenience the Army and Public'. A Bristol businessman, a Mr E.
Bryan, however, was less circumspect and confidently issued a Gd. token
with the strange device: 'Genuine Silver Dollar'. The currency of most
tokens was restricted to their own localities, and they were subject to an
increasing discount with distance. To overcome this a Is. token issued
in London in 1811, inscribed 'To Facilitate Trade', also carried a design
of four hands joined and the names of the four towns of 'London, York,
Swansea, Leeds' where they were accepted (R. Dalton 1922). Forgery,
even of tokens, was rife, many being 'mules' which combined the
obverse of one coin with the reverse of another (though not all mules
were forgeries). The technical requirements for producing tokens were
of course the same as those needed for forgery; it was an easy, profitable
but highly dangerous temptation. Thus William Booth, to give just one
example, a farmer of Perry Bar, produced not only his 'WheatsheaP
tokens but also forged Bank of England 35. tokens. On 15 August 1812,
at the third gruesome attempt, he was finally hanged for counterfeiting
and forgery.
An abortive parliamentary bill attempted to suppress the making and
passing of tokens in 1812, but they continued to be traded in
considerable volume until an Act to Prevent the Issuing and Circulating
of Pieces of Copper and other Metal usually called Tokens' was
eventually passed in July 1817; but even then certain exceptions were
allowed, for instance the tokens issued by Poor Law unions, until 1821,
by which time the official supply of coinage had increased enough to
make tokens redundant. Before seeing how this official control over
coinage was re-established, it is necessary to examine government
policy regarding the financing of the wars of the time and their
inflationary consequences, together with contemporary opinions in the
great debate between the 'bullionists' and the 'anti-bullionists' which
provide one of the most famous examples of the perennial swing of the
pendulum between the narrow and the wide interpretations of the
meaning of money.
The sudden outbreak of war with France in February 1793 was
quickly followed by the failure of a number of country banks and a
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THE ASCENDANCY OF STERLING, 1789-1914
decline in their note circulation with consequential difficulties for the
many businesses that had come to rely on them. But the degree of
failure and possibly the amount of decline in circulation has been
greatly exaggerated. Instead of the hundred bank failures commonly
given, and repeated by Sir John Clapham, Pressnell's researches show
only sixteen bank failures for the whole of 1793 - grim, but not
devastating. Between 1750 and 1830 the total number of country banks
which failed was 343. Clearly the country banking system was unstable;
yet the exaggerated picture usually painted lent undeserved force to the
general underestimation of the positive part played by the banks in
Britain's industrial growth (Pressnell 1956, 443). Be that as it may, the
1793 crisis led to such a severe drain from the Bank of England that the
government set up a 'Committee on the State of Commercial Credit' as
a result of which the Treasury was permitted to issue up to £5,000,000
Exchequer bills, of which some £2,202,000 in denominations of £100,
£50 and £20 were actually issued.
In addition the Bank, as we have seen, first began to issue notes as
low as £5. In thus helping to alleviate the shortage of currency and in
effect acting as lender of last resort (although that concept was for
future discovery) the Bank and Treasury together helped the country to
weather what has been described as 'the worst financial and
commercial crisis it had yet known' (Clapham 1970, II, 259).
No sooner had the Bank of England rebuilt its reserves of gold coin
and bullion from their low point of £4 million in 1793 to some £7
million in 1794 than severe new drains, both internal and external,
began to occur. Lending to the government itself was one of the biggest
drains. Early in 1793 the directors of the Bank of England were
becoming increasingly concerned that in agreeing to such lending they
were in danger of infringing a clause in their original charter which
forbade them to lend to the government without the express approval of
Parliament. The directors therefore proposed that the government
should bring in a bill granting them legal indemnity in making any
loans to the government up to £50,000. William Pitt, the Prime
Minister, readily agreed to the Indemnity Bill - but got it modified
cleverly without any limit! Obviously in the earlier part of any war the
brunt of any expenditure has to be met from borrowing before the
slower yield from taxation can catch up.
In addition to increased expenditure on Britain's own armed forces
Pitt sent large subsidies to her allies, a total of more than £15 million
between 1793 and 1801, including a loan of £1,200,000 sent to Austria
in July 1796. The external drain was considerably intensified when the
grossly inflationary issues of assignats (paper notes originally based on
THE ASCENDANCY OF STERLING, 1789-1914
299
the value of Church and other lands confiscated by the French
revolutionary government) were replaced in July 1796 by a gold-based
currency. This had the effect of drawing bullion back from Britain.
Although an attempted French invasion of Ireland in the winter of 1796
was thwarted, an invasion of Britain was imminently expected. On 22
February 1797 French troops landed at Carreg Wastad near Fishguard:
it could hardly be called a raid, let alone an invasion, for the French
troops, mistaking a distant gathering of women in Welsh costume as
uniformed troops, ignominiously surrendered. However when rumours
of the landing reached London, a run on the banks quickly ensued,
bringing down the reserves of the Bank of England on 25 February to
their lowest point in the war, at £1,272,000. An emergency meeting of
the Privy Council was called on Sunday morning, 26 February, which
resolved that 'the Bank of England should forbear issuing any cash', a
situation confirmed by the 'Bank Restriction Act' of 3 May 1797. The
restriction, then expected to be of very short duration, was in fact to
last until 1 May 1821. A new era of inconvertible paper had arrived.
By the Bank Indemnity Act Pitt had eased his path to securing the
bulk of the short-term funds he required. According to Andreades, 'No
government had ever had such a formidable weapon placed in its hands'
(1909, 191). Before long Pitt had found an even more powerful weapon
for securing longer-term finance, namely the income tax. This came
into operation in April 1799 at Is. in the pound (10 per cent) on
incomes over £200, with lower rates down to £60, below which no
income tax was levied. On average in its first three years, to the great
satisfaction of the government, the new income tax raised £6 million
annually. The range of indirect taxes was widened as far as possible. In
the immortal words of Sidney Smith, in the Edinburgh Review of
January 1820, there were:
Taxes upon every article that enters the mouth, or covers the back, or is
placed under the foot - taxes upon everything which is pleasant to see, hear,
feel, smell or taste - taxes upon warmth, light, locomotion - taxes on
everything on earth, and the waters under the earth - on everything that
comes from abroad or is grown at home - taxes on the raw material - taxes
on every fresh value that is added to it by the industry of man - taxes on the
sauce which pampers a man's appetite, and the drug that restores him to
health - on the ermine which decorates the judge, and the rope which hangs
the criminal - on the poor man's salt and the rich man's spice - on the brass
nails of the coffin, and the ribands of the bride - at bed or board, couchant
or levant, we must pay. The school-boy whips his taxed top; the beardless
youth manages his taxed horse with a taxed bridle, on a taxed road; and the
dying Englishman pouring his medicine, which has paid seven per cent, into
a spoon that has paid fifteen per cent, flings himself back upon his chinz
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THE ASCENDANCY OF STERLING, 1789-1914
bed, which has paid twenty-two per cent, makes his will on an eight pound
stamp, and expires in the arms of an apothecary, who has paid a licence of
£100 for the privilege of putting him to death. His whole property is then
immediately taxed from two to ten per cent. Besides the probate, large fees
are demanded for burying him in the chancel. His virtues are handed down
to posterity on taxed marble, and he will then be gathered to his fathers to
be taxed no more.
It is abundantly clear that the weight of the fiscal burden, both
through taxation and through long-term borrowing, by removing so
much purchasing power from the people made the task of monetary
policy that much easier. As well as heavy taxation the government
raised so much money by long-term borrowing that the national debt,
which had been £273 million in 1783, rose to £816 million in 1816 of
funded debt, plus a large amount of £86 million of floating or short-
term debt. Between the same years the annual interest or service charge
on the national debt had risen from £9.5 million to £31 million. If the
taxation had been lighter or if the national debt had been lower, then
the government would have had to rely, however unconsciously, on the
hidden taxation of a much more inflationary monetary policy than
actually occurred. To modern observers imbued with strong
inflationary expectations of what governments may feel forced to do in
wartime, the price rises of the early nineteenth century seem laudably
modest. To contemporaries, stalwart believers in the virtues of a stable
value of money, the general rising trend of prices seemed deeply
disturbing and puzzling. Matters were brought to a head by the
publication on 8 June 1810 of the 'Report from the Select Committee of
the House of Commons on the High Price of Bullion', one of the most
famous monetary documents of the last two centuries.
The science of index numbers of prices was in its infancy at the
beginning of the nineteenth century and never really entered into the
arena of public discussion until much later. Consequently other
indicators were needed in order to gauge whether and to what extent
general price changes were taking place. The two basic indicators of the
changes in the value of the paper pound, related to and confirming each
other, were on the one hand the state of the foreign exchanges with
other major trading countries and on the other hand, the 'premium on
gold', by which was meant the extent to which the price of gold had
risen above its pre-inconvertibility mint parity. The mint par value of
the pound sterling was 123.25 grains of 22 carat gold, i.e. eleven-
twelfths fine, or at the rate of £3. 17 's.l&lid. per ounce. This was the
price paid by the mint, and naturally involved the customer in a certain
amount of cost and inconvenience and in waiting his turn, and so was
THE ASCENDANCY OF STERLING, 1789-1914
301
not worthwhile for smaller transactions. The much more convenient
and immediate exchanges at the Bank of England, covering the whole
range of personal, retail or wholesale customers was priced at the
official rate of £3. 175. Gd., the 4VW. difference being simply a token
contribution towards the much higher real costs saved by using the
Bank as intermediary. Those persons who wished to return as soon as
possible to this traditional convertibility were therefore known as
'bullionists', while the supporters of the government and of the Bank of
England in its policy of deferring such convertibility until after the end
of the war and meanwhile emphasizing the practical advantages of the
suppression of cash, i.e. gold, payments, were known as 'anti-
bullionists'.
The remit of the Bullion Committee was thus 'to enquire into the
Cause of the High Price of Gold Bullion, and to take into consideration
the State of the Circulating Medium, and of the Exchanges between
Great Britain and Foreign Parts'. In bald summary the committee's
well-supported and lucidly expressed findings were that the premium
on gold and the depreciation of the value of the pound on the foreign
exchanges were to a substantial degree caused by the creation of an
excessive amount of credit, principally by the Bank of England through
issuing too many notes but also through being too liberal in
discounting bills of exchange. Therefore the only cure was to return to
full convertibility of Bank of England notes after two years, and of the
notes of the country banks and of the chartered banks of Ireland and
Scotland shortly thereafter, whether or not the war would be over by
then.
The chairman of the committee was Francis Horner, son of an
Edinburgh merchant, and educated at Edinburgh High School and
Edinburgh University, but with two years spent in England 'to rid
himself of the disadvantages of a provincial dialect' (Rees 1921). Apart
from being co-founder of the Edinburgh Review this report was his
only but amply sufficient claim to fame. The committee's vice-
chairman was William Huskisson, who was to become a liberalizing
President of the Board of Trade, and who suffered the final dubious
distinction of being killed by a train at the ceremonial opening of the
Liverpool to Manchester Railway in 1830. These two, together with the
banker-economist Henry Thornton, actually wrote the report, which
was promptly laid before Parliament on 10 June 1810, but was not
formally debated until May 1811. The views it contained were widely
debated outside Parliament, with most of the economists, including
Malthus and Ricardo, strongly supporting the bullionist side, but with
most of the practising bankers and businessmen supporting the anti-
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THE ASCENDANCY OF STERLING, 1789-1914
bullionist position of the Bank of England and of the government. But
there were cross-currents of opinion and some notable changes of
position over the years, in a debate which reflected the controversies of
over a century earlier, preceding the great currency reform of 1696, and
which foreshadowed the Currency versus Banking School arguments of
the mid-nineteenth century and the monetarist as opposed to the neo-
Keynesian beliefs of today. Those interested in controversial
cross-currents should read Viner (1937) or Clapham (1970), while those
wishing a straightforward, neutral account with a full copy of the
report should see Edwin Cannan's The Paper Pound (1919). 1
With the clarity of our hindsight, the views expressed to the committee
by the Governor and former Governor of the Bank of England were
incredibly perverse. They put forward the view that (a) there was no need
to consider the state of the foreign exchanges or the premium on gold
when they decided their policies on note issuing or discounting,
providing that they dealt only with bills of exchange raised in the course
of sound commercial business; (b) subject to the same proviso, it was
impossible to overissue or to overdiscount; c) raising or reducing the rate
of discount would have no effect on the volume of business, because no
businessman would incur the costs of borrowing unless it was essential
for carrying on his trade. Thus Mr Whitmore, the Governor, states quite
categorically: 'I never think it necessary to advert to the price of Gold, or
the state of the Exchange, on the days on which we make our advances'
(Cannan 1919, 34). When asked if the temptation to overissue or
overdiscount would be increased by reducing the rate from 5 per cent -
the maximum permitted by the usury laws - to 4 or even 3 per cent, the
Governor replied that the result would be 'precisely the same'; while the
Deputy Governor dutifully supported him in replying 'I concur in that
answer' (Cannan 1919, 48). That the reliance on sound commercial bills
- the famous 'real bills doctrine' - was an insufficient safeguard against
an excess issue of notes or of advances was easily demonstrated by the
committee: 'While the rate of commercial profit is very considerably
higher than five per cent there is in fact no limit to the demands which
Merchants may be tempted to make upon the Bank for accommodation
and facilities by discount' (Cannan 1919, 51).
The committee went on to show how the note issue had in fact
increased from £13,334,752 in 1798 to £19,011,890 in 1809, an increase
of 45 per cent, but with an increase of 170 per cent in notes under £5,
which rose from £1,807,502 in 1798 to £4,868,275 in 1809. The
committee also stressed the importance of the velocity of circulation and
^or a more recent penetrating analysis see 'The recoinage and exchange of 1816-17',
unpublished Ph.D. thesis, University of Leeds, by K. Clancy of the Royal Mint (2000).
THE ASCENDANCY OF STERLING, 1789-1914
303
financial innovation — views of surprising modernity insufficiently
stressed by most historians. Thus the report shows that 'The effective
currency of the Country depends on the quickness of circulation, and
the number of exchanges performed in a given time, as well as upon its
numerical amount', while 'Your Committee are of opinion that the
improvements which have taken place of late years in this Country, with
regard to the use and economy of money among Bankers, and in the
modes of adjusting commercial payments, must have had a much greater
effect than has hitherto been ascribed to them, in rendering the same
sum adequate to a much greater amount of trade and payments than
formerly' Not all the economic verities were, however, possessed by the
bullionists. They underestimated the autonomous nature of much of the
country banks' money-creating powers and, using the quite plausible
excuse of the unreliability of the figures on the total of note issues by
these banks and the lack of figures on their discounts, came rather too
readily to the conclusion that 'the amount of the Country Bank
circulation is limited by the amount of that of the Bank of England'
(Cannan 1919, 54) and so absolved the country bankers from their share
of the blame for excess issue by heaping it all on to the Bank of England.
Even Sir John Clapham is forced to admit that 'the Bank witnesses
showed up badly as economists' (he could hardly do otherwise); but he
makes the supremely telling point that 'many of their critics showed up
no better as politicians' (1970, II 28). For there was a war on, and any
serious attempt by the Bank to return during the war to full convertibility
would have led to such strong deflationary pressures that the economic
strength of the country would have been gravely imperilled at the most
critical of times. As the Chancellor of the Exchequer, Spencer Percival,
wrote at the time, the Bullion Report's recommendations were equivalent
to 'a declaration that we must submit to any terms of peace rather than
continue the war'. It was this vital matter, rather than any fine points of
economics, that carried the day when the time came to vote on the debate
in Parliament. Horner had drawn up the main conclusions of his report in
the form of Sixteen Resolutions which he laid before parliament, every
one of which was rejected. The government's views, and that of the anti-
bullionists, were put forward by Nicholas Vansittart, who, going one
better than Horner, put forward seventeen Counter-Resolutions, which
were all carried, despite the weak economic basis of many of them.
Vansittart's third resolution, based on a mixture of wishful thinking
and the inertia of the general public in their monetary customs,
asserted that 'the promissory notes of the Bank of England have
hitherto been, and are at this time, held in public estimation to be
equivalent to the legal coin of the realm'. This brazen denial of any
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THE ASCENDANCY OF STERLING, 1789-1914
depreciation at all in the paper pound was immediately challenged by
Lord King, who in a letter to his tenants demanded payment in gold or
in an additional sum of notes equal to the market price of that gold. As
a result Stanhope's Act of 1811 was hurriedly passed which had the
effect of safeguarding payments in bank notes at the nominally
contracted prices. The Act refused to take the clear-cut and logical
decision of making Bank of England notes legal tender, but at least it
was a step, awkward and stumbling, in that direction.
When the end of the long, burdensome war came at last in 1815 it
seemed at first as if the Bank would be able to return to convertibility
within six months just as the government had already intended; but a
renewed drain on the Bank's reserves forced a further postponement. The
government did however set about establishing gold as beyond doubt the
official standard of the currency. A report of the Privy Council on the
coinage recommended in May 1816 that gold should be the only
standard, at the traditional parity of 123.25 grains per pound sterling,
and that a new coin, the 'sovereign' of 205. should be issued. By the
Coinage Act of 1816 these recommendations were put into effect utilizing
the new mint which had been ready for such large-scale demands,
awaiting the return of peace, since 1810. Britain thus legally and most
belatedly recognized the gold standard towards which the country had
very largely moved early in the previous century. It required the
resumption of convertibility to confirm the legality of the new gold
standard in practice. The long-awaited Act for the Resumption of Cash
Payments was passed in 1819, allowing free trade in bullion and coin, and
stipulating that full convertibility would have to be restored by 1 May
1823. As it happened the Bank's reserves improved so strongly that cash
payments were resumed in full from 1 May 1821 - without having had to
resort to the intermediate stage of the 'ingot exchange system' advocated
by Ricardo - after twenty-four years and two months of a paper pound.
A related Act of 1819 had once again removed the Bank's indemnity in
lending to the government for more than three months without the
permission of Parliament, which had been granted in 1793. The coinage
system, still held to be the obvious and unquestioned foundation of the
country's monetary system, was thus soundly reconstructed. It was now
time to turn public attention to what in fact had already become the far
more important component of money, not only in London and Scotland,
but throughout the kingdom, i.e. the banking system.
The Bank of England and the joint-stock banks, 1826-1850
The three legislative landmarks in the history of the development of
THE ASCENDANCY OF STERLING, 1789-1914
305
banking in the nineteenth century are those of 1826, 1833 and 1844. In
each case the Bank of England's monopoly position in banking,
particularly with regard to note issue, was the central feature, although
other aspects of banks' credit-creating powers, such as those concerning
the discounting of bills of exchange, also attracted considerable
attention. It is interesting to see how the opinions of practical bankers,
politicians and economists, in an era of prolific publicity, were all
changing to embrace either a wider definition of money, or the
acceptance of the view that a wider range of financial instruments
needed to be controlled in order to control the quantity of money.
Gradually the bullionist versus anti-bullionist arguments changed into
those of the Currency versus the Banking School, described below,
again illustrating the eternal swing of the pendulum between the
narrower and the wider vision of a money supply that everyone now
agreed was larger and wider than was previously in existence. For even
those who had previously held the narrowest, most blinkered view, now
openly accepted notes as money and not simply as a money-substitute,
while even the Bank of England had before the end of the 1820s
explicitly admitted that its total issue of notes was dependent upon
variations in the rate of interest which it charged for discounting bills;
and - a further significant change - this was so even in circumstances
where all such bills were generated in the course of genuine and sound
commercial transactions. The anti-bullionists now conceded the
bullionist case that note issues could thus be increased or decreased at
the discretion of the Bank; and this carried the corollary that the
achievement of convertibility, even when combined with a conservative
and cautious policy of discounting, was not enough to supply the right
amount of money to satisfy the demands of trade. Convertibility merely
carried the micro-economic advantage of guaranteeing to a person the
ability of changing paper money into gold at a fixed price. Everyone
now had to concede that convertibility could not also carry any macro-
economic guarantee of supplying the country with the optimum
quantity of money. Some additional controls over paper money as well
as over metallic money, over the relationship between the notes of the
Bank of England and those of other banks, over discount rate policy
and over the metallic backing of notes, were all seen to be required,
although the light did not dawn in a single blaze of knowledge. As usual
it was the recurrence of financial crises that crystallized the debates into
legislative form. The closely related developments of theory and
practice may thus conveniently be traced in three stages, to 1826, 1833
and 1844 respectively.
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THE ASCENDANCY OF STERLING, 1789-1914
The Banking Acts of 1826
The revival of prosperity in the early 1820s, after an initial depression,
gradually gathered momentum into a speculative boom that
culminated in an economic crisis and a banking panic at the end of
1825. When the Resumption of Cash Payments Act was passed in 1819
it was the stated intention to end the circulation of banknotes under £5
two years after the actual resumption. But the depressed state of
agriculture, still by far the country's largest employer, coupled with the
vested interests of the country bankers, led the government to adopt a
reflationary, expansionist policy through a combination of monetary,
fiscal and administrative means. Already in 1821 the Bank of England
extended its normal maximum period of acceptance of bills for
discount from sixty-five to ninety-five days, thus increasing the liquidity
of bills in general. In 1822, reversing the previous policy, the government
passed an Act to prolong the life of small notes by ten years, from 1823
to 1833, a lease of new life which was not to be fully consummated.
Coincident with this increase in liquid funds, market rates of interest
began to fall, a move confirmed in June 1822 when the Bank of England
reduced its rate of discount from 5 per cent to 4 per cent. The Bank's
lending policy, even on very long-term loans, was similarly expansive,
for beginning with a loan of £300,000 at 4 per cent to the Duke of
Rutland in 1823, the bank granted over fifty mortgages totalling more
than £150 million, secured by landed estates, during the next two years
(Clapham 1970, 82-4).
The Chancellor of the Exchequer, E J. Robinson, aptly dubbed
'Prosperity Robinson', together with Huskisson, now President of the
Board of Trade, developed fiscal policies to reinforce the reflationary
monetary policy. In his budgets of 1823, 1824 and 1825 Robinson
substantially reduced the rates and narrowed the range of taxes. The
government took advantage of the lower rates of interest to reduce the
burden of the national debt. Vansittart converted £150 million of 5 per
cent stock to 4 per cent in 1822, while Robinson followed this up by
converting £70 million of 4 per cent stock to 3V2 per cent in 1824. The
successful revolt of the Mexican and South American colonists against
Spain opened the doors wide for the export of British goods — the
economic counterpart of Canning's famous 'calling the New World to
redress the balance of the Old'. The greater liberality of the government
towards company formation was shown by the repeal of the Bubble Act
in 1825. Between 1824 and 1826 some 624 new companies were
provisionally registered with a nominal capital worth nearly £400
million, but since a large number of these never really got going the
actual totals were considerably less. All the same there was something
THE ASCENDANCY OF STERLING, 1789-1914
307
of a company mania reminiscent of 1720. As well as domestic new
investment on a large scale there were considerable exports of capital,
some to rebuild European business and governments, some in riskier
deals in Mexico and South America. The fashion for wealthy Britons to
make the Grand Tour of Europe led to a sizeable deficit on the 'tourist
account'. Huskisson's freer trade policy though, undoubtedly to the
long-term general good of British producers and consumers, had the
initial result of contributing to a surge in imports (as well as
permanently destroying the Spitalfields silk weaving industry). The net
result of these various drains was to reduce the reserves of the Bank of
England from the exceptionally high figure of £14.2 million in 1823 to
the dangerously low point of only £1,260,890 by early December 1825.
Belatedly the Bank reacted by raising its discount rate back up to its
legal maximum of 5 per cent on 13 December.
Already in September 1825 several banks in Devon and Cornwall had
failed, including the fairly large firm of Elfords of Plymouth. Much
more serious was the failure, despite help from the Bank of England, of
the London firm of Pole, Thornton and Co. since, with forty-three
country correspondent banks, the effects of its failure were quickly felt
throughout the country. During December 1825 some thirteen country
banks failed, and during the crisis as a whole a net figure of sixty banks
failed (a figure rather smaller than the seventy or more commonly
given, but some of these latter 'failures' were branches, while a few were
temporary failures of banks which eventually managed to reopen).
Nevertheless the failure of sixty banks demanded urgent action and
some fundamental reform of the banking system.
The immediate panic was alleviated by the Bank of England's liberal
acceptance of collateral and by issuing £1 notes printed in 1818 which
had lain half-forgotten since then in a large storage box. The mint was
also pressed into overtime to produce as many sovereigns as possible to
help to overcome the liquidity shortage that always accompanies a
financial crisis. Despite the blame attached to the Bank of England and
government policy in general for having overstimulated the economy,
there was almost unanimous agreement that the single most important
cause was the elastic supply of small notes by the small and weak
country banks, weak especially when compared with the joint-stock
and co-partnership banks of Scotland, where only one bank had failed
since 1816. The Prime Minister, Lord Liverpool, in introducing the
remedial legislation, made his famous criticism: Any small tradesman,
a cheesemonger, a butcher or a shoemaker may open a country bank,
but a set of persons with a fortune sufficient to carry on the concern
with security are not permitted to do so.' Stronger banks issuing larger-
308
THE ASCENDANCY OF STERLING, 1789-1914
denomination notes, those were the key reforms that experience had
shown to be urgently required. By an Act of 22 March 1826 no more
notes of less than £5 were to be issued and all outstanding small notes
had to be redeemed by 5 April 1829. By a second Act, passed on 26 May
1826, the Bank of England's century-old monopoly was partly broken,
by allowing joint-stock banks with note-issuing powers to be set up
outside a radius of sixty-five miles of the centre of London. In return
the Bank of England was explicitly authorized to set up branches, or
'agencies' anywhere in England and Wales. Daniel Defoe's Bank of
'London' was about to become in truth the Bank of England.
Branches of the Bank of England were quickly opened in 1826, at
Gloucester (19 July), Manchester (21 September) and Swansea (23
October). Five more were opened in 1827, at Birmingham, Liverpool,
Bristol, Leeds and Exeter. The Newcastle branch opened in 1828,
followed by those of Hull and Norwich in 1829, Plymouth and
Portsmouth in 1834 and Leicester in 1844. Apart from the London
branches - the 'Western' in 1853 and the 'Law Courts' in 1881 - the
only other branch was that of Southampton, opened in 1940, the same
year that a Glasgow 'Office' was opened for exchange control purposes,
not being strictly speaking a 'branch' or 'agency'. The branches
received a mixed reception, being warmly welcomed in some towns,
such as Gloucester and Swansea (and invited in vain to others, such as
Carlisle) and actively opposed in towns like Exeter; the local newspaper,
the Exeter Flying Post, lamenting 'of all men who are sinned against by
this uncalled-for interference on the part of the Bank of England, none
are less deserving it than the Bankers of our own City' (BEQB,
December 1963, 280). The new branches for the most part saw
themselves as aggressively active competitors with the local banks,
whether old country banks or new joint-stock banks. In particular they
discounted local bills at most competitive rates, - discounting nearly
£5.5 million for 1,000 clients in 1830, so exceeding the totals for
Threadneedle Street - and entered into special agreements with local
banks in order to boost the issue of Bank of England notes, partly for
their own profit but also for the economic and social reasons behind the
legislation of 1826. The Bank had always had a particular dislike for
small and other easily forged notes. Between 1797 and 1829 some 618
persons were capitally convicted for forging notes and many of these
were hanged. The harshness of the death penalty not only led juries to
ever greater reluctance to condemn culprits but dragged the prosecuting
Bank into public distaste. There is therefore a great deal of truth in a
Bank historian's comment that 'for reasons both financial and humane,
the Directors ceased issuing small notes as soon as they could'
THE ASCENDANCY OF STERLING, 1789-1914
309
(Giuseppi 1966). Nathan Rothschild, and Overend and Gurney were
prominent in persuading Peel to bring in an Act of 1832 which reduced
the maximum penalty for forgery from death to transportation for life.
(Francis 1862, 230-1). 2
The prohibition of small notes was intended to apply also to
Scotland despite the much greater role played there by small notes and
the much greater strength of the Scottish banks. The proposal aroused
the wrath of the Scots and the powerful ridicule of Sir Walter Scott,
who wrote a series of letters which appeared in the Edinburgh Weekly
Journal in February and March 1826 under the pseudonym Malachi
Malagrowther. After demonstrating the superiority of the Scottish
banking system and the disastrous consequences that would follow
abolition of their customary small notes, he asks: 'Shall all be lost to
render the system of currency betwixt England and Scotland uniform?
In my opinion Dutchmen might as well cut the dikes and let the sea in
upon the land.' The letters forced the government to allow Scotland its
small notes; no wonder that Scott's portrait still adorns some current
issues. The letters, though triggered off by mundane matters of finance,
went on to question the politics of the Union. As P. H. Scott wrote
recently in a new edition of Malachi Malagrowther's Letters (1981),
'they dealt in a way which is still topical with the whole question of the
relationship between Scotland and England'. Scottish notes had
circulated in the bordering counties of England for many years, and
despite the 1826 Act and a further motion by the Chancellor of the
Exchequer in 1828 'to restrain the circulation of Scottish notes in
England' they continued to be popular in those districts up to 1845
(Phillips 1894).
The Bank Charter Act 1833
In December 1827 the Bank of England minuted its acceptance of the
bullionist view that its volume of discounting could indeed influence the
value of the pound on the foreign exchange markets. By this admission
of its previous fundamental error the way was opened for discussing the
removal of the 5 per cent maximum rate under the usury laws. But the
volume of the Bank's discounts and the related volume of Bank of
England notes could not be logically discussed in isolation either from
the matter of how to control the issues of other banks or the legal
tender nature of Bank of England notes, in the absence of which the
other banks would always insist, whenever they faced the slightest
2 Hanging for forging the Bank's notes was thus finally abolished - largely the belated
result of 'easily the world's most socially-significant fantasy in the field of paper
money' namely 'the "Bank Restriction Note" designed by George Cruikshank',
R. W. Hoge, The American Numismatist (July 1985).
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THE ASCENDANCY OF STERLING, 1789-1914
strain, on drawing gold rather than notes from the Bank. As soon as the
1826 Act had become law a series of joint-stock banks were set up,
growing to around fifty by 1832, of which thirty-two were new and the
rest enlargements of previous partnership banks. Thomas Joplin, a
Newcastle timber merchant, well versed in the superiority of Scottish
banking, was actively involved in promoting a number of these, for
fittingly enough, he had been one of the most powerful driving forces in
bringing about the modification of the Bank of England's monopoly.
He was also busily planning an ambitious 'National Provincial Bank of
England' with branches in the main towns, though this did not come to
fruition until 1833. In the mean time he took his quarrel with the Bank
of England a stage further. According to his meticulous reading of the
original Acts, joint-stock banks, provided that they did not issue notes,
could quite legally be set up even within sixty-five miles of London, an
opinion hotly disputed by the Bank. The difference arose from the fact
that when the Bank was first granted its monopoly, note issue was
considered inseparably essential to banking. That this was no longer
the case seemed a large loophole for Joplin and his supporters, but a
mere, unjustified quibble to the Bank of England.
As it happened, the Bank of England's charter was due for renewal in
1833, and so the time seemed right to seek further clarification of the
matters in dispute. Early in 1832 the government set up a committee of
inquiry which considered all aspects relevant to the renewal, including
the usury laws, the Bank's monopoly, the legal position of non-note-
issuing banks and the granting of legal tender status to Bank of
England notes. The Bank could not be complacent about the
concessions it might be forced to make to secure the renewal of its
charter, for at a time of great public unrest the Bank had become
associated in the minds of some of its most vociferous critics with that
section of ultra-conservative opinion that resisted parliamentary
reform. Hence radicals were ready to follow leaders like Francis Place
who invented the slogan 'To Stop the Duke [of Wellington] Go for
Gold', an incitement which led to an ineffectual but frightening run on
the Bank in May 1832, and the dispatch of pikes and sabres to its
branches, some of which still form an eye-catching display at the Bristol
branch. After much heated debate, in and out of Parliament, the Bank
Charter Act was finally passed on 23 August 1833.
The Act renewed the Bank's charter for twenty-one years from 1
August 1834, but with a break clause after ten years. Bank of England
notes were to become legal tender (against the wishes of Peel and a
sizeable minority) in England and Wales, a privilege not extended to
Scotland or Ireland. This would help to stop internal drains. Bills of
THE ASCENDANCY OF STERLING, 1789-1914
311
exchange up to three months were removed from the ambit of the usury
laws. In this quiet way, what was to become the famed 'Bank Rate'
instrument of policy for the next 150 years was born, though the first
breaking of the 5 per cent ceiling did not take place until 1839. In order
for the government to be able to monitor Bank policy more closely a
weekly return of the Bank's accounts, including its note issue and
reserve of bullion had to be sent confidentially to the Treasury, while a
monthly summary was to be published in the London Gazette.
Accompanying legislation required all other banks to publish quarterly
returns of their note issues so that any tendency to excess issue could
more easily be exposed to public view. After this seven-year spate of
investigation and legislation one might be forgiven for expecting a
period of agreement or at least compromise and financial calm. On the
contrary, the debate hotted up to reach a new pitch of intensity as the
views of the two opposing monetary camps became more stridently and
more dogmatically asserted.
Currency School versus Banking School
Believers in the 'Currency Principle' were so called because, naturally
enough, they believed that gold and bank notes, especially Bank of
England notes, were the only proper money or currency; all other forms
of bank credit were simply second-rate substitutes, of use only because
they allowed people to economize in using real money. Their logical
starting point was the London foreign exchange market in which gold
provided the link and value indicator between internal and external
currencies. Britain's currency, i.e. gold plus notes, should be made to
behave as if it were entirely of gold. Experience had shown that
convertibility was not enough to guarantee this. Any loss of gold to
other countries should require the banks to reduce their note issues by
the same absolute amount so that UK prices would fall, and foreign
prices rise, together acting to restore equilibrium on the foreign
exchanges and in the relative price levels. It was little wonder that
convertibility alone did not suffice when hundreds of banks were, in a
totally uncoordinated fashion, allowed to issue their own notes. The
response was not, in those circumstances, quick enough to prevent
excessive fluctuations in finance and in trade. Ideally, as Ricardo
advocated, a single state note-issuing authority would be the best way
of making note issues increase or decrease in line with the 'influx' or
'efflux' of gold. Since this ideal could not be brought about overnight,
the next best alternative would be to encourage the Bank of England in
its policy of taking over the issues of the other banks. (We have seen
how the Bank came to special arrangements with many country banks
312
THE ASCENDANCY OF STERLING, 1789-1914
for the latter to give up their own issues in favour of Bank of England
notes, receiving privileged access to bill discounting at the cheap rate of
3 per cent.) In modern terminology the Currency School (by the 1840s
both camps were calling themselves 'schools') was a classic example of
money being conceived in the narrowest possible way consistent with
the circumstances of the time and, typical of all such narrow views, they
obviously believed that money should be created and controlled by the
central monetary authorities - exogenously as we would say - in the
financial and administrative capital of the country, the City of London
and the Parliament at Westminster.
The main supporters of the Currency School were Samuel Jones
Loyd, a banker who later became Lord Overstone; Robert Torrens, ex-
colonel of Marines and a keen amateur economist; G. W. Norman and
W. Ward, both directors of the Bank of England, a fact that helped to
strengthen the natural predilection for central banks to be in favour of
the narrower view of money. Exceptionally, as we saw at the time of the
Bullion Report of 1810, the Bank then felt constrained to support the
anti-bullionist position of the government, a view happily recanted in
1827, and in practice years earlier. As early as 1832 J. Horsley Palmer,
Governor of the Bank, together with G. W. Norman, had formed the
view that it was essential for the Bank to hold about one-third of its
assets in the form of bullion, the rest being in government securities.
Thus all liabilities payable on demand, i.e. notes and deposits, were
backed by a reserve of one-third in bullion. This so-called Palmer Rule
was not, as Clapham shows, strictly followed: 'Palmer and Norman
were describing the fair weather practice of a single decade, not
promulgating a dogma' (1970, II, 125). As it turned out, to the discredit
of the Palmer Rule, the volatility of bank deposits was greater than that
of notes, so that when customers drew down their deposits to get gold
from the Bank, its note issues were not correspondingly reduced. And
as Loyd made clear in his evidence to the Committee on Banks of Issue,
1840, 'Whenever the aggregate paper circulation of the country fails to
conform to the fluctuations of the bullion then mismanagement is justly
said to occur' (Feavearyear 1963, 262). The Currency School was
desperately seeking a better method than the Palmer Rule for linking
the supply of notes more closely to variations in the flows of bullion.
The Banking School was led by the Revd J. Fullarton; Thomas
Tooke, author of the compendious History of Prices; J. W. Gilbart,
founder of the London and Westminster Bank; and James Wilson,
founder-editor of The Economist. It was a strongly talented group with
a wide and varied experience of business and finance. The Banking
School started from the opposite pole to that of the Currency School,
THE ASCENDANCY OF STERLING, 1789-1914
313
for the former insisted that the banks supplied money in a wide variety
of forms to suit the demands of their customers, and notes were just one
form among many other functionally similar forms of money. It was the
flow of trade in all parts of the country which generated the issue of
banknotes, or the volume of cheques or of bills of exchange and so on.
Although followers of the Banking School were not always consistent or
in full agreement on matters of method, they were unanimously and
steadfastly of the opinion that in practice money was much more than
simply gold and notes. 'Bank notes' said Fullarton are simply 'the small
change of credit.' It followed therefore that 'it was absurd to attempt to
regulate prices by attending to notes only, for they were merely a part,
and were rapidly becoming a minor part, of the total paper circulation'
(Feavearyear 1963, 266). The Banking School was, however, too blind to
see that the freedom which the banks possessed in granting credit could
be used to excess, excusing themselves by Fullarton's 'law of reflux'
according to which every note issued in response to a demand for a loan
would automatically be returned to the bank when the loan was repaid,
so that 'The banker has only to take care that they are lent at sufficient
security, and the reflux and the issue will, in the long run, always
balance each other' (Fullarton 1845, 64). Urgent events were to prevent
the complacent acceptance of long-run tendencies. Clearly the Banking
School represented the classical case of a wide interpretation of the
meaning of money and of the important and as yet still geographically
dispersed role of the banks as (passive) providers of money. In modern
terminology money was mainly bank money, endogenously created
throughout the country by market forces, and not just exogenously and
arbitrarily by the mint and the Bank of England in London.
Each school realized that their opinions were of much more than
purely academic concern. The country had suffered from two crises in
three years, in 1836 and 1839. The government had set up a Committee
on Joint Stock Banks which met from 1836 to 1838 and was then
supplemented by a Committee on Banks of Issue in 1840. Clearly the
government was about to legislate once again on matters of money and
banking, as concern rose over how to deal with the interrelationship
between bank failures, business bankruptcies and the severe drain of
gold from the reserves. In November 1836 one of the apparently
strongest of the new joint-stock banks, the Northern and Central Bank
of England, failed. Based in Manchester, it had rapidly built up a
network of thirty-nine branches in the north-west which had been
enjoying a boom induced by trade with a buoyant market in USA.
The bimetallist controversies in the USA (see chapter 9), the failure of
the Agricultural and Commercial Bank of Ireland in November 1837
314
THE ASCENDANCY OF STERLING, 1789-1914
and of the Bank of Belgium together with a run on the French banking
house of Lafitte and other failures on the Continent around the same
time, led to recurrent drains of gold from the reserves of the Bank of
England. Although it managed to scrape through the 1836 crisis
without too much difficulty and had built up its reserves back to a
creditworthy level of £9.5 million in January 1839, in the following
months the drain became so severe that it was forced to take the historic
step of raising bank rate for the first time to 5'A per cent on 20 June, and
then more boldly to 6 per cent on 1 August. It had also to face the
humiliation of borrowing £2 million from Paris and £0.9 million from
Hamburg. Even so its reserves fell to the dangerously low level of £2.3
million in October. Fears of an inconvertible pound had been narrowly
averted by these stop-gap expedients. Obviously a new way of ordering
the nation's finances was urgently required.
The Bank Charter Act of 1844: rules plus discretion
With the possible exception of the 1694 Act which set up the Bank of
England, no other piece of financial legislation has caused so much ink
to be spilled as the Bank Charter Act of 1844, both at the time and
subsequently. It combined most of the rules demanded by the Currency
School and by the Bank of England with just a little of the discretionary
powers demanded by the Banking School for the commercial banks but
grabbed by the Bank of England, which in the national interest, as it
saw it, managed to get the best of both schools. Perhaps the most
flattering and telling summary of the importance of the Act in helping
to secure real, non-inflationary growth over most of the following
seventy years is given, ironically enough, by the Radcliffe Committee of
1959, whose report marks the nadir of belief in the importance of
money, and not unnaturally heralded the most rampant period of
inflation in British history:
The Act remained on the statute book because the ceiling it fixed (on note
issues) had come to be regarded as an assurance against any collapse of the
value of the pound. For this reason the 1844 legislation, despite all its
shortcomings, was one of the pillars of the English monetary system, and
has left its mark on later statutes, even until quite recent times. (Radcliffe
Report 1959, para. 522)
In the Act to Regulate the Issue of Bank Notes, and for giving to the
Governor and Company of the Bank of England certain Privileges for a
limited Period' - to give the 1844 Act its full title - some eighteen of its
twenty-eight clauses deal directly with the problem of note issue either
of the Bank of England or of the other banks, while a number of other
clauses do so indirectly. Clause 1 states that 'the issue of notes of the
THE ASCENDANCY OF STERLING, 1789-1914
315
Bank of England . . . shall be separated, and thenceforth kept wholly
distinct from the general Banking Business'. As Peel later explained,
'The Issue Department might be in Whitehall and the Banking
Department in Threadneedle Street', thus clearly expressing the
generally held concept of rigid rules for the currency and apparently
unfettered discretion in carrying on its ordinary banking; a discretion
soon to be limited by the need to develop its central banking functions.
The Issue Department was to receive from the Banking Department
some £14 million of government securities to back its fiduciary issue of
notes, any issue above that to be fully backed by gold and silver, the
latter not to exceed one quarter of the gold. (Since 1861 the Bank has
kept none of its reserve in silver.) Notes were to be given on demand at
£3. 175. 9d. per ounce; this price, rather than the previous official rate
of £3. 175. 6d. had arisen thanks to the bargaining power of Nathan
Rothschild who in 1836 insisted on dealing directly with the mint at
£3. 175. lOVid. until the Bank raised the price for him, and so for
everyone else, by 3d. The Bank had now to send a weekly return to the
Treasury, the famous 'Return' then being published. According to one
historian, writing on the hundredth anniversary of the Act, this weekly
return was its most important provision - a pardonable exaggeration.
(It was a great time for economic enlightenment. James Wilson, of the
Banking School, had just issued the first Economist on 2 September
1843, while the Bankers' Magazine followed in 1844.) The Bank of
England was empowered to increase its fiduciary issue by up to two-
thirds of any lapsed issue, while other clauses of the Act aimed to make
sure that the issues of the other banks would be ended as quickly as
possible (although this was to take more than seventy years, not the
dozen or so expected by Peel and his Currency School supporters). The
final clause contained various definitions, including 'the term Banker'
which 'shall apply to all Corporations, Societies, Partnerships and
Persons carrying on the Business of Banking, whether by the Issue of
Bank Notes or otherwise'. As it turned out it was certainly 'otherwise'
than by the issue of banknotes that banking subsequently developed,
and in so doing prevented the British economy from becoming severely
constrained in its later growth.
These constraints on other banks' notes were as follows. No new
note-issuing bank was to be set up anywhere in the UK. With regard to
the existing issuers in England and Wales any merger, except where the
combined partners remained less than seven, was to cease issuing; a
penalty also applying to any bank opening an office within sixty-five
miles of London. Any temporary cessation of issue, and of course any
bankruptcy, entailed cancellation of issue. The maximum issue allowed
316
THE ASCENDANCY OF STERLING, 1789-1914
to any bank was its average issue in the twelve weeks before 26 April
1844. Until 1856 the Bank of England could pay a commission to induce
other banks to cease issuing their notes voluntarily. The Act thus made
it clear that 'real money' should properly still be the prerogative of the
centralized state. Scottish banks however retained their existing issues,
as did those in Ireland, according to the Bank Acts of 1845 which
sought to apply some of the provisions of the English Act to those
countries. Important differences remained. They could (like the Bank of
England) increase their issues if backed by bullion. Amalgamation
carried no penalties, nor did setting up an office in London; and they
retained their £1 notes, as in 1826: positive Celtic discrimination,
though with eventually diminishing returns.
Amalgamation, limited liability and the end of unit banking
Although mergers between the private banks of the eighteenth century
took place from time to time it was not until after the legislation of
1826 that amalgamation became of any significance. One of the earliest
examples of a London private bank merger was that of Humphrey
Stokes of the Black Horse, founded in 1662, which joined with John
Bland in 1728, and again with Barnett and Hoare in 1772. One of the
first country mergers (also like the former to become eventually part of
Lloyds) was a Caernarvon bank which was taken over by a Chester
bank in 1796, the owner of the former bank staying on as manager of
what was now a branch. Although such examples were not rare, the
pace of merger remained very slow until after the crisis of 1825. In the
next nineteen years, until the legislation of 1844 put the brakes on, there
were 122 amalgamations. In contrast, in the eighteen years from 1844 to
1861 inclusive there were only fifty-four amalgamations in England and
Wales (Sykes 1926, 18). This change in the pace of merger was to a large
extent because of the restrictions on note issue laid down in the 1844
Act, for although the London banks and those in most of Lancashire
had given up their note issue, by far the greater part of the country
banks were still heavily dependent on their own notes. The new Act
denied these banks their traditional method of growth and inhibited
and distorted amalgamation by making mergers between most medium
and large banks costly, while still allowing small banks with just two or
three partners to merge without having to face such a heavy penalty in
lost note issue. Similarly at a time when trade and communications
between London and the provinces were being speeded up and growing
in scale as never before, the natural process of amalgamation between
banks in the capital and the regions was heavily penalized.
THE ASCENDANCY OF STERLING, 1789-1914
317
The situation with regard to the volume of note issue in 1844 was
that some nineteen banks in Scotland were authorized to issue notes to
the total value of £3,087,000, while the 280 note-issuing banks in
England and Wales (208 private and 72 joint-stock) had a total
authorized issue of £8,632,000. In addition to its fiduciary issue of
£14,000,000 the Bank of England had a fluctuating gold-backed issue
which in 1844 averaged £5.1 million, giving a total issue for the country
as a whole of around £31 million. The sacrifice of a note issue of £8.6
million for the English banks was not easy, since the banks involved had
to change their style of banking. Furthermore note issue was not only
profitable but it also was a cheap and effective way of advertising and
carried with it a certain amount of esteem and prestige. Nevertheless
the new trend towards deposit banking combined with the use of
cheques rather than notes was already clearly visible before the
legislation of 1844 gave the banking system as a whole a hefty push in
that direction. Thus whereas 93 (or 82 per cent) of the 114 banks
formed between 1826 and 1836 were note-issuing, only 7 (or 19 per
cent) of the 37 banks founded between 1837 and 1844 issued notes
(Pressnell 1956, 159).
A further barrier to banking progress was erected in 1844 in the
shape of an 'Act for the Better Regulation of Joint-Stock Banking',
although its constraints were to apply only to new banks. No new bank
could be set up without obtaining a twenty-year charter granted by the
Crown. The minimum nominal capital was to be £100,000 and no bank
could begin operating until at least 50 per cent of its capital had been
paid up. The minimum denomination of shares was to be £100,
statements of assets and liabilities had to be published monthly and
annual accounts had to be independently audited. These conditions
were at that time felt to be so stringent that only three banks were set up
in the following decade and only ten by 1857, by which time the
government decided to repeal such obviously excessively onerous
legislation. Other factors in addition to inappropriate legislation
deterred new bank formation during this period when capital was
drawn to railways and other financial institutions at home and abroad
in such a speculative frenzy that the new Bank Charter Act had to be
suspended twice, in 1847 and 1857. Just as the bad harvests of 1845 and
1846 led to the repeal of the Corn Laws, which had previously restricted
imports, in 1846 - a victory for the Anti-Corn Law League - so the
pressing need for greater liquidity at the height of the railway mania of
1847 seemed to justify the claims of the Anti-Gold Law League' that the
1844 Bank Charter Act was far too restrictive. The Treasury's letter
suspending any penalty on the Bank of England from exceeding its
318
THE ASCENDANCY OF STERLING, 1789-1914
fiduciary limit, coupled with a high bank rate, was sufficient to restore
calm (as we shall see later in tracing the development of the discount
houses). In 1857 the Bank was however forced to print £2 million
additional notes, of which some £928,000 were actually issued. By 1857
it had become clear to all that, however useful the Bank Charter Act
might be, there was no purpose at all in retaining the 1844 Joint Stock
Banks Act in operation. Its repeal was bound up with more
comprehensive reforms in company law. Most of the irksome provisions
of the 1844 Joint Stocks Act were therefore repealed in 1857 and the rest
in 1862, by which time two further questions relevant to banking
structure, including amalgamation, were becoming matters for public
discussion and legislation. These two burning issues concerned the
granting of limited liability to shareholders and the 'reserved liability'
inherent in a company's authorized but uncalled capital.
The growth of the economy depended largely on the effective
mobilization of savings and their distribution via an efficient capital
market in a way in which any risk to shareholders was limited to the
share of capital subscribed by them. Generally speaking, the new
privileges granted to shareholders as the market for capital grew were
made available to non-bank company shareholders before being
granted to bank shareholders, who were considered a special case: and
even when the new legal freedoms were extended to banks, many
bankers at first preferred not to take advantage of them. Companies
lost their automatically illegal status when the Bubble Act was repealed
in 1825, but shareholders in general were still liable for the debts of
their company without limit unless the company had a Royal Charter
or was specifically authorized by Act of Parliament. It was this latter
aspect, as much as its technical promise which caused railways to be the
major attraction for Victorian investors, and 'it was the railway that
won the acceptance of general limited liability' (Shannon 1954, 376).
However, despite doubts about limited liability, 'after railways, banks
were among the most important objects of joint-stock company
formation in nineteenth-century Britain' (Anderson and Cottrell 1975,
598).
The year 1844 was also a milestone in company law, for in that year
an Act for the Registration, Incorporation and Regulation of Joint-
Stock Companies' was passed. It did not apply to Scotland or to banks,
which had already been fully dealt with. It set up a Registrar with
whom prospective companies had to register, and it laid down
conditions regarding shares and prospectuses. By this Act companies
could now be legally recognized and regulated, but still shareholders
faced unlimited liability, partly because public opinion was divided on
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319
this question. Even a report by the Royal Commission on Mercantile
Law (1854) had a majority against general unlimited liability, and
although perversely the resultant Limited Liability Act of 1855
followed, it was such a half-hearted and ambiguous affair that it was
repealed almost immediately and replaced by a much more effective
Joint Stock Companies Act 1856. At last 'General limited liability had
come, and with it the modern era of investment' (Shannon 1954, 379).
Banks however had to wait a couple of years, until the 1858 Limited
Liability Act, to avail themselves of this privilege, a concession made
even easier to obtain when the great consolidating Companies Act of
1862 was passed. As W. T. C. King (1936) says, A steady trickle of
banking formations, which had its source in the Limited Liability
statute of 1858 became by 1862 a rushing torrent', twenty-four new
banks being formed between 1860 and 1875. A company mania was in
full swing, culminating in the banking crisis of 1866, when the 1844
Bank Act was suspended for the third and last time in the nineteenth
century. The company mania was triggered off by the coming of limited
liability; but the fact that Overend and Gurney, the main culprit in the
crisis, had suddenly made itself a limited company just before the crash,
reopened the sharp divisions in opinion as to whether or not banking
companies should take advantage of the new legislation. In any case
note issues were not covered by limited liability, a further cause of the
declining trend in country bank notes.
Those bankers who opposed limited liability for banks argued that
the proprietors of banks should be confined to persons of substance
whose fortune and probity formed the bank's true guarantee in the eyes
of the public and especially its customers. For the same reason they
were opposed to the issue of shares of small denomination which would
allow men and women of little wealth to become shareholders.
Furthermore limited liability would tend to make bankers more
recklessly supportive of risky business ventures, while competition from
bankers with limited liability, by attracting business away from sounder
banks, would act to the long-term detriment of the community at large.
These conservative opinions were found chiefly among the long-
established and most prestigious banks. Those who favoured limited
liability, coming chiefly from among the new joint-stock bankers, saw
the need for banks to grow rapidly in line with the growth in other
businesses by attracting capital from a widely dispersed base of
shareholders from all over the country. The vast new army of small
investors in high-saving Victorian Britain (many of them spinsters and
widows), needed the protection which only limited liability could give
to their savings. The arguments continued indecisively for twenty years
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THE ASCENDANCY OF STERLING, 1789-1914
from 1858 to 1878, for the custom of many banks to retain a large
percentage of their nominal subscribed capital in uncalled form acted
to some extent, though far less than unlimited liability, as a deterrent
against encouraging investment too easily by persons of little means.
The events of 1878 brought matters suddenly to a head, by dramatically
demonstrating the dangers to shareholders in the absence of limited
liability, irrespective of the form in which the bank's capital was
structured.
In October 1878 the City of Glasgow Bank failed, involving its 1,200
shareholders with calls of five times their paid-up capital. Since its
formation in 1839 the Glasgow Bank had grown to be one of the largest
in Scotland - and so one of the largest in Britain - with 133 branches,
deposits of over £8 million and a note circulation of £800,000.
Overexpansion and deliberate fraud had gone hand in hand, but could
no longer be hidden from public gaze. Although hundreds of innocent
shareholders, mostly in Scotland, were either ruined or severely pressed,
the banking system in Scotland and Britain as a whole weathered the
storm. It became painfully obvious however to all doubters that the
time had come to bring about a form of banking legislation which
would incorporate limited liability in a manner fully acceptable to the
great majority of bankers. This was largely the work of George Rae.
Rae was born in Aberdeen in 1817 and joined the North of Scotland
Bank at Peterhead as branch accountant in 1836. In 1839 he was
appointed inspector of branches at the North and South Wales Bank
head office in Liverpool, and went on to become the bank's chairman
and managing director in 1873. When the 'Wales' Bank was finally
absorbed by Midland in 1908 it was the largest bank they had taken
over up until that time.
Rae was clearly a banker with the highest credentials, and apart from
his successful work in bringing in limited liability in a legislative form
which banks would readily adopt, he is best known for his authorship
of The Country Banker: His Clients, Cares and Work, from an
Experience of Forty Years, published in 1885. Rae's advice helped to
steer the new Companies Bill quickly through Parliament, despite
opposition for political reasons unconnected with banking from Irish
MPs. The Companies Act 1879, also known from its chief provision as
the Reserved Liability Act, allowed banks, whether previously of limited
or unlimited liability to register under the new Act with their capital
divided so as to provide a 'reserved liability' callable only if the
company were to be wound up. In the next few years there was a
widespread rush by banks to register under the new Act and to avail
themselves of limited liability. Banks which had previously hesitated in
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321
taking over others with unlimited liability were able to re-register so as
to preclude such dangers, in this way stimulating further
amalgamations. This rush towards limited liability was accompanied
by a stronger movement towards the regular publication of balance
sheets, for as George Rae put it, 'a strong balance sheet attracts
business'.
In the period between the Companies Act of 1862 and the Baring
Crisis of 1890 there were 138 amalgamations, with the joint-stock
banks being by far the largest amalgamators, absorbing sixty-six
mostly small private banks and forty, usually larger, joint-stock banks.
Private banks absorbed thirty-one other private banks and one joint-
stock bank. In this way the structure of banking was rapidly changing
from unit to branching, and from note-issuing to cheque-using and
deposit-taking. Apart from the National Provincial, no bank had set
out from the beginning to cover the country with a network of
branches. They had started as single-office local banks, and in a few
cases, before the amalgamation fever took control, they had grown
organically into regional banks. Organic growth was slow compared
with taking over one or more branches of another bank, which had
already made its contacts with local businesses and which had trained
staff already in position (though having to transfer its loyalties). If
amalgamation in practice almost always meant a reduction or a
complete loss of note issue, on the other hand it usually meant the
possibility of a more rapid attraction of deposits. As the competitive
process of amalgamation continued, so the field was left to ever larger
banks with a disappearing note issue. There were still in 1880 some 157
note-issuing banks in England and Wales with a total issue of
£6,092,123. By 1900 there were 106 banks, but only fifty-five were by
then still note-issuing, with a total of £2,618,465. By the end of 1914
there were only eleven note-issuing banks left, with a total issue of just
£401,719. Apart from those of the Bank of England, which insisted on
its right to increase its issues by two-thirds of the lost issues of the other
banks, country bank note issues ceased in 1921 when Lloyds absorbed
Fox, Fowler and Co. of Wellington, Somerset, with its fifty-five
branches. Unit banking had virtually come to an end - except for the
non-note-issuing Gunner and Co. of Bishop's Waltham, absorbed by
Barclays in 1953.
We have seen how the 1844 Bank Charter Act was especially hard on
attempts by country banks to enter London, or London banks which
sought to take over note-issuing country banks. A key date in this
connection is 1866, when the National Provincial Bank gave up its
lucrative and substantial note issue of around £400,000 (without
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THE ASCENDANCY OF STERLING, 1789-1914
receiving any hoped-for compensation from the Bank of England) in
order to establish a London branch: its existing London office had been
purely used for administration and had carried out no banking
business. In course of time all the other large country banks did
likewise. 'When Lloyds Bank, hitherto confined to the Midlands,
absorbed two well known houses in 1884, when the Birmingham and
Midland Bank took over the Central Bank of London in 1891, and
when Barclays united fifteen private firms into one large company in
1896, it was plain that the day of the small local bank, whether private
or joint-stock, was very near its end' (Crick and Wadsworth 1936, 37).
Lloyds was at first reluctant to move its head office from Birmingham
to London, but eventually the pull of London was so strong that all
head office business was transferred to London in 1910, a pattern
followed by the other banks.
Because of their larger size and growing international business the
Scottish banks had recognized the importance of having a branch in
London long before most of the English banks. Thus as early as 1864
the National Bank of Scotland opened its London office, and around
the same time efforts were made jointly by the Bank of Scotland, the
Union Bank and British Linen Bank to set up a commonly owned joint-
stock bank in London. When it became clear by 1866 that these
complex negotiations would fail, the separate banks sought their own
solutions, the Bank of Scotland opening its own London branch in
1873. In 1874 the Clydesdale Bank began to open a number of branches
in Cumberland. The English bankers greatly resented the Scottish
'invasion' and thought that the Scottish banks should be forced to give
up their note issues when coming to London. However the nine Scottish
banks involved presented a 'Memorial' in March 1875 to the Chancellor
of the Exchequer, Sir Stafford Northcote, as follows: 'We do most
strongly protest against our freedom to carry on the business of
banking in England, distinguished from issue (especially in the
Metropolis of the nation, where all our operations centre and are
ultimately settled), being made dependent upon the surrender of our
rights of issue in Scotland' (Rait 1930, 305). The Scots turned out to be
clear winners in the Anglo-Scottish banking war of 1874-81 (Gaskin
1960, 445-55) . This was a tribute not only to the strength of their legal
case but also an acknowledgement of the superior average size and
standing of Scottish banking.
One of the main reasons why the country banks wished to secure a
footing in London was to be able to get their accounts, increasingly in
the form of cheques, settled through the London Clearing House. The
private bankers of London first set up their clearing house in 1770, but
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323
they did not admit any joint-stock banks until 1854, nor any country
banks until 1858. The privilege was far from being automatic, and a
good presence in London was held to be a strong recommendation. The
reduction of stamp duties on cheques to a uniform duty of a penny,
irrespective of distance, in 1853 was a further expanding and
centralizing stimulus. The Bank of England was admitted in 1864,
greatly simplifying the clearing process. The importance of such
developments is shown by the rise in the value of clearing (mostly
cheques) from £954 million in 1839 to £12,698 million in 1910, an
increase of more than twelve times. By 1914, of the total of sixteen
members of the London Clearing House Association no less than
thirteen were joint-stock banks.
By this time Britain had become, compared with other countries, a
highly banked nation. Whereas in 1851 there was only one bank office
in England for every 20,000 persons, by 1914 there was one office per
5,000 (and one for about 3,000 in Scotland). These were, however,
average figures, and although banks had become indispensable not only
for the wealthy but also for all business and professional persons of any
size, the vast bulk of the population had still never been inside any of
the commercial banks so far described. The working classes had been
developing their own financial institutions parallel with, but to a large
extent not directly connected with, the main banking system.
The rise of working-class financial institutions
Friendly societies, unions, co-operatives and collecting societies
It was money for a rainy day that provided the main stimulus for setting
up working-class financial institutions in the nineteenth century, and it
was the various kinds of savings banks that achieved solid success
rather than the wild and sporadic attempts at other forms of banks for
workers. Money transmission for small sums did not become an item
on the working-class agenda until the latter half of the century, apart
from the short-lived experiment by Owenite trade unions in the 1830s
in issuing 'Labour notes'. Of the many thousands of burial clubs,
benefit clubs, box clubs (with triple locks and three keys kept by
separate individuals for greater security), friendly societies, building
societies, trade union collectors, ancient 'orders', church and chapel
associations, and industrial insurance societies which sprang up in
bewildering profusion in the latter part of the eighteenth and early part
of the nineteenth centuries, it was the friendly society which first
became both prominent and acceptable enough in the eyes of the
authorities to gain some form of legal recognition. Support for
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THE ASCENDANCY OF STERLING, 1789-1914
legislative encouragement of saving among the poor was widespread
and included influential public figures such as T. R. Malthus, Jeremy
Bentham, Samuel Whitbread, William Wilberforce, Patrick Colquhoun,
and, above all, Captain George Rose, RN, MP, whose forceful initiative
led to the Friendly Societies Act of 1793 and to other legislation even
more directly responsible for protecting the growing savings of the
working classes.
The protection which the Friendly Societies Act offered was eagerly
sought after by a number of working-class organizations which,
chameleon-like, assumed the outward appearance of the friendly
society at a time when official opinion was not only still influenced by
the Bubble Act's dread of unbridled organizations, but in addition was
obsessed by a consuming fear that the subversive fever of the French
Revolution might spread throughout Britain under cover of all sorts of
apparently innocent organizations. Yet at the same time even
governments wedded to laissez-faire wished to strengthen the saving
habits of the poor if only to relieve the rapidly rising burden of the poor
law. Furthermore a large number of the new collecting agencies were
either weak or fraudulent or both. If the rules which governed the best
of them could be used as a general guide for those who sought the
protection of the new Act, under the supervision at first of local justices
of the peace, then not only would these numerous new organizations be
made visible to the authorities but they would also escape from the
general prohibition under the Bubble Act (and the strengthened specific
legislation against potential revolutionaries embodied in the Anti-
Combination Acts of 1799 and 1800). Thus the Friendly Societies Act
1793 became an umbrella giving shelter to all sorts of working-class
organizations, especially the building societies. It was not surprising to
find that when a Registrar of Friendly Societies was set up later he
became responsible for supervising the building societies also.
There was a great deal of overlapping in the functions, membership
and leadership of these various organizations with, for example,
building and benefit societies becoming combined and with the co-
operative movement setting up its own insurance, building society and
banking affiliates. Before the trustee savings banks were properly set up
a series of 'Sunday Banks' were formed by church ministers in Bishop
Auckland, Wendover, Hertford and elsewhere. An intense rivalry
developed between church and chapel on the one hand and the public
houses on the other as centres for collecting local savings. For the
working classes, savings as well as socialism owed more to Methodism
than to Marxism. Before turning to examine the growth of the two
major savings institutions to emerge from these rather amorphous early
THE ASCENDANCY OF STERLING, 1789-1914
325
developments, the building societies and the savings banks, we shall
first look briefly at the dismal failure of British trade unions to set up
their own banks, at the moderate, if belated, success of co-operative
banking, and at the substantial growth of the industrial life assurance
societies.
In 1833 and 1834 Robert Owen and his followers set up a National
Equitable Labour Exchange with its headquarters in Charlotte Street,
London, and with branches in most of the major towns. Antedating in
this very practical manner by some thirty years Marx's labour theory of
value, the National Labour Exchange under its Governor, Robert
Owen, issued Labour Notes to the value of one, two or five hours,
redeemable at designated 'Exchange Stores' scattered throughout the
country. This multi-branch, quasi-bank crashed however when the
Grand National Trades Union, of which it was the financial
counterpart, failed towards the end of 1834. This dismal failure helps to
explain why trade union banks failed to re-establish themselves in
Britain, in contrast to their great successes in other countries such as
Germany.
Co-operative banking also exhibited a half-hearted and belated
growth in Britain when compared with continental co-operatives. Legal
opinion in Britain was divided on whether banking was a proper
activity for co-operative societies, the negative view being made explicit
in an Act of 1862, although this same Act, by allowing societies to own
shares in each other's associations paved the way for the integration of
the separate co-operatives into the Co-operative Wholesale Society,
which with its stronger clout managed to get the clauses prohibiting
banking repealed in 1872. The first Co-operative Congress held in 1869
had pressed strongly for a co-operative bank, so that as soon as the
legal bar was removed the CWS Bank was formally established in 1872.
The various local co-operatives were encouraged to deposit their
surplus funds in their new bank. By the end of the first quarter of 1872
the bank's assets amounted to the not very significant total of £8,000;
but renewed propaganda on its behalf saw its assets rise to as much as
£2 million by 1900. Its banking functions were very limited in range,
consisting mainly in accepting the deposits of its member societies, and
later of an increasing number of trade unions (and later still of local
authorities), which it invested in government securities and gilt-edged
stock, while it also undertook the financing of bulk purchases on their
behalf, e.g. of Danish dairy produce, and dealt with the foreign
exchange aspects of such trading. The CWS Bank used the services of
the Westminster Bank for clearing purposes, while the local societies in
which the CWS Bank's branches were first based still had to have
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THE ASCENDANCY OF STERLING, 1789-1914
accounts with branches of one of the clearing banks for the many
banking functions which their own bank failed to provide. However,
despite its limitations, the CWS Bank had already by the 1890s become
'both a settling house for the cooperative movement on its trading side
and an investment institution for groups or individuals attached to the
movement' (Fay 1928, 418). By 1914 its assets had grown to £7 million,
but it had not yet shown its ability to compete for business and
customers by providing a wider range of banking services for the
general public.
A number of the collecting clubs and friendly societies, particularly
after the local groups were drawn into regional and national
'Federations' and 'Orders', such as the Oddfellows, the Druids, the
Foresters, the Hearts of Oak and the Rechabites, in the middle decades
of the nineteenth century, were able to grant higher interest as a result of
the much larger aggregate sums now being invested. Typically they
expanded from simply gathering the basic minimum sums needed to
avoid the stigma of a pauper's funeral to being able to provide
substantial life assurance and sickness benefits based on increasingly
sound actuarial principles. Whereas the old-established insurance
companies such as the Sun, Royal and London Assurance companies
appealed to the relatively wealthy, who made their premium payments
monthly or quarterly by cheque, the new collecting societies, such as
the National Friendly Collecting Society, the Wesleyan and General, the
Salvation Army Assurance Society Ltd and the Royal Liver Friendly
Society, and the so-called 'industrial' life assurance associations such as
the Pearl, the Pioneer, the Prudential and the Refuge Assurance
Companies - all these depended very largely on the door-to-door
canvasser and collector, who timed his regular weekly visits just after
the breadwinner arrived home and was of course paid in cash. Although
in legal form the societies, in being owned by their members, differed
from the companies, which were owned by their shareholders, in
practice and in the competitive process of time they converged in the
type and value of the services which they offered. Their economic
effects were also similar in that they both provided affordable sickness
benefits and life assurance, and gathered together the small rivulets of
local working-class savings from scattered towns and villages into large,
easily investible reservoirs in the City of London.
They provided an essential ingredient in the successful growth of
working-class savings and so helped to increase the wealth, welfare,
security and stability of Victorian society. By the time Lloyd George
introduced his legislation for compulsory health and unemployment
insurance in 1911 the voluntary collecting societies had provided him
THE ASCENDANCY OF STERLING, 1789-1914
327
with an admirable model, and so the existing twenty-four industrial
insurance offices were offered as officially 'approved societies' for the
workers' choice. By that same year of 1911 when the welfare state was
born, the total assets of the twenty-four life offices had grown to
£118,842,000, and the total accumulated payments to policy-holders
had by then amounted to £181,418,000. By looking after the pence,
which without the kindly, self-interested intervention of 'the man from
the Pru' would have been frittered away, the pounds had looked after
themselves. According to no less an authority on the Victorian age than
Professor Asa Briggs, 'there are few books in history which have
reflected the spirit of their age more faithfully and successfully than
Smiles's "Self-Help", published in 1859. Samuel Smiles himself, in his
chapter on 'Money: Its Use and Abuse' summed up saving as being 'an
exhibition of self-help in one of its best forms' (Briggs 1958, 27). Two
other groups of savings institutions, tailored mainly to meet the needs
of the working classes, remain to be examined, namely the building
societies and the savings banks.
The building societies
Among a number of initiatives which seemed at first likely to give rise to
quasi-building societies but which in the event turned out to be false
starts was the Land Buyers' Society of Norfolk which was in operation
from about 1740. As its name suggests, its relatively well-to-do
members clubbed together to purchase a fairly large plot of land, which
was then subdivided into their own individual plots for erecting houses
surrounded by their own gardens. Their activities fell away into
obscurity after a few years, possibly because the larger landowners
objected to the whittling away of large estates and 'the making of a
parity between Gentlemen and Yeomen and them which before were
labouring men' (Davies 1981, 14). What is now generally accepted as
being the first genuine example of a British building society was that
formed by Richard Ketley, landlord of the Golden Cross Inn, Snow Hill,
Birmingham. In 1775 Ketley formed a group of his customers and
friends into a society for saving regularly to finance the purchase of
their own houses. Most, though not all, of the early societies closely
combined saving with building, the membership therefore being
generally confined to purchasers of houses within their own scheme.
The oldest existing stone-and-mortar evidence of the soundness of
these early self-help societies is still to be seen in the sturdy shape of
Club Row, Longridge, near Preston, which was built between 1793 and
1804. In the fifty years between 1775 and 1825 at least sixty-nine such
societies have been definitely authenticated, but if the term 'building
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THE ASCENDANCY OF STERLING, 1789-1914
society' is less strictly defined, the number may well be as high as the
figure of 'over 250' given by one of the earliest historians of the
movement, Seymour Price (1958). The movement spread gradually from
the Midlands to the West Riding and Merseyside, reaching Scotland in
1808 in the shape of the Glasgow and West of Scotland Savings,
Investment and Building Society, its name indicating the greater
flexibility now being given by a few even of the newer societies in not
tying saving inseparably to building. The first London society did not
appear until 1809 when the Greenwich Union Society was formed. The
Greenwich soon became involved in a legal case of considerable general
interest to the movement. In 1812, in the case of Pratt v. Hutchinson, the
bogey of the Bubble Act was raised threatening the future existence of
the movement. Hutchinson, a guarantor for a delinquent member of the
Greenwich, sought to avoid making overdue payments on the grounds
that 'the Society was a mischievous and dangerous undertaking and
should be declared a public nuisance' under clause 18 of the Bubble Act,
and that 'raising a sum by small subscriptions for building houses' was
specifically condemned by the framers of that Act. Although the court
found in favour of the society it was not until 1836, significantly after
the repeal of the Bubble Act in 1825, that some sort of legal recognition
was given to building societies as such and not simply from their
assumed similarity to friendly societies. Building societies had at last
arrived on the Statute Book as legal entities in their own right.
Until 1845 all the building societies considered themselves as
temporary associations, terminating when all their members had
secured the houses financed by their joint funds, but in that year the
first of the permanent societies was formed. Sometimes second, third or
fourth terminating societies, occasionally coexisting would bear the
same name (hence making it rather difficult for researchers to be certain
of the precise number in being in the earlier days of the movement, as
indicated above). It was a quite natural step from temporary to
permanent status, though in the first instance it was coupled with the
rivalry between public house and chapel which split the Woolwich
supporters of the original terminating society (which met regularly at
the Castle Inn under the chairmanship of its landlord, Mr Thunder),
from the teetotal followers of Dr Carlile, pastor of Salem Chapel,
Woolwich, who chose a schoolroom as their meeting place. England's
first permanent building society, after protracted negotiations, was duly
registered in 1847 as the Woolwich Equitable Benefit, Building and
Investment Association. The movement as a whole was rather slow to
see the benefits of permanency, especially in the North, which
'remained steadfast to the original aim - a house for every member'.
THE ASCENDANCY OF STERLING, 1789-1914
329
Thus the majority of the 2,000 societies which registered in the ten years
after 1846 were terminating types, although the powerful advocacy of
Arthur Scratchley, examiner of the newly founded Institute of Actuaries
(1848) turned the movement increasingly towards the permanent
principle. Even so it was not until March 1980 that the last British
example of the terminating society, the First Salisbury, finally expired,
by which time it had become merely an interesting historical relic, for of
the 287 permanent societies in existence in 1985 some 200 were
established as permanent societies in the period from 1846 to 1879. The
bedrock of existing societies was formed within a remarkably brief but
highly productive period of fifteen years after 1845, thus fully justifying
their founders' faith in first calling them 'permanent'.
In order to operate permanently, the societies separated the investor in
a flexible manner from the borrower to the greater benefit of both, and so
assisted in the faster rate of growth and sounder security of most of the
new societies formed around the early part of the second half of the
nineteenth century, which included all of today's so-called Big Five. The
Woolwich, which as we saw, became permanent officially in 1847, had its
germination in 1843; the Leeds was formed in 1848; the Abbey National
(or at least its 'national' part) in 1849; the Halifax in 1853; and, a little
late, the Cooperative Permanent, now known as the Nationwide, in 1884.
In 1890 there were 2,795 separate building societies, more than treble the
peak number, at around 800, which the banks had reached in 1810; and
there were still some 2,286 societies in 1900, in contrast to the 106 banks
in England and Wales. Almost all the building societies were small, local
and with few branches. Yet their ubiquity testified to their
indispensability in providing mortgages and acting as a vehicle for the
savings of the working class - mostly with considerable security.
Amalgamation would not disturb the unit structure of the building
societies until well into the second half of the twentieth century, but the
societies felt the need for some common organization to safeguard their
interests, particularly in view of the incomplete and insecure legal
status grudgingly granted in 1836. Local associations were set up in
Liverpool and in Birmingham in the early 1860s, following which a
national Building Societies Protection Association came into being on 1
January 1869, the occasion being marked by the first issue of the
Building Societies Gazette. Among the strongest of the external
pressures that gave rise to such protective devices was the Royal
Commission on Friendly Societies which was, following a number of
scandals and after some delay, set up in 1870, and again exposed to
public view the failings of the friendly and building societies. The
Gazette and the Association became deeply involved in the
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THE ASCENDANCY OF STERLING, 1789-1914
Commission's investigations and managed to bring about very
favourable modifications in the proposed legislation to control the
societies. Consequently the Building Societies Act 1874 turned out to be
so favourable to the societies that it became known as their Magna
Carta, remaining in essence unchanged for over a hundred years. All
building societies, whether they were the old 'unincorporated' type set
up under the 1836 Act, or the new 'incorporated' type under the new
Act, were now unambiguously placed under the control of the Chief
Registrar of Friendly Societies. The liabilities of individual borrowers
were limited to the amount due on the mortgage (the previous bad
habit of some societies in levying ridiculously heavy penalty payments
being abolished). Although terminating societies were still allowed, the
Act favoured the permanent principle, marking a further stage in the
decline of temporary societies. The Act laid down that amalgamation
or 'transfers of engagements' required the consent of three-quarters of
the members involved holding at least two-thirds of the value of the
shares. The fact that the building society movement had been able so
skilfully to turn the strictures of the Royal Commission into a
benevolent 'Charter' is eloquent testimony to the enormous surge of
progress achieved in the first few decades of the life of the permanent
societies, some of which were beginning to establish branches; but in the
main the barriers against amalgamation delayed for almost three-
quarters of a century the development of a nationwide system of
societies, when compared with the growth of joint-stock banking.
Despite certain restrictions laid down by the 1874 Act (to curtail
activities felt to be dangerous), such as limiting the average borrowing
to not more than two-thirds of the value of the mortgaged property, and
preventing societies from owning land or buildings except for their own
use (to prevent speculation), some of the more aggressive societies
found ways round these obstacles. Thus the failure of the Sheffield and
South Yorkshire Society in 1886 can be traced back to its rash policy of
industrial investment, including loans of £65,000 to the Dunraven
Colliery in south Wales. It had strayed dangerously too far from
investing locally in housing. Failure however did not always mean loss
for members, whether as lenders or borrowers, for there were many
cases like that of the Wandsworth Equitable, which, forced into failure
in 1889, had its engagements prudently transferred to the neighbouring
Woolwich. But the movement was about to be shaken to its foundations
in the early 1890s by the failure of what was then by far its largest and
most flamboyant member, the Liberator Building Society.
The Liberator was first registered in 1868 and soon achieved, under
the leadership of Jabez Spencer Balfour, an unprecedented rate of
THE ASCENDANCY OF STERLING, 1789-1914
331
growth, securing £1 million of assets within its first ten years. The
important single factor contributing to its rapid growth was the strong
support of its membership in chapels and temperance associations,
stimulated by a vast network of hundreds of agents among ministers,
elders and laymen who found the cause appealing and the commissions
paid equally acceptable. The enormous and well-founded success of its
first decade led on to unjustified excesses by which the nature of the
society was changed into something approaching a speculative
investment holding company. It had direct connections with seven other
companies including the London and General Bank, the House and
Land Investment Trust and J. W. Hobbs and Co. - a speculative builder
to which company alone the Liberator made advances of over £2
million, much of this being 'secured' merely by second or third
mortgages. Thus the society became involved in the partial ownership
of banks, hotels, chapels, collieries, chemical companies, land
reclamation sites and harbour constructions, including involvement in
the repeated rebuilding of a vulnerable sea wall (with a valuation in the
books equal to its total repeated rebuilding costs!).
The failure of Balfour's London and General Bank in September 1892
brought down the whole house of cards, with total losses of over £8
million to the depositors and shareholders of the Liberator and its
associated companies. Six of the directors were altogether sentenced to
a total of thirty-seven years' imprisonment, ranging from four months
to fourteen years. The fall of the Liberator brought down a number of
other societies, including the London Provident Society. The inevitable
parliamentary inquiry of 1893 led on to the Building Societies Act of
1894 which attempted to achieve a number of objectives mainly by
means of greater publicity. First, it demanded fuller information from
every registered society and required annual accounts to be properly
audited and certified before being sent on to the Chief Registrar. It gave
the Registrar much greater powers, including the right to suspend or
cancel any society's certificate after due investigation. Thirdly, advances
on second or subsequent mortgages were forbidden; and fourthly, the
various systems for balloting in mortgages were ended so far as new
societies were concerned. In view of the considerable if temporary
importance achieved by various balloting and similar unconventional
societies during the years 1850-90, the subject requires at least a brief
discussion.
The originator of a host of imitative societies based on balloting
members for priority in being allocated a house was Dr Thomas E.
Bowkett, who first put his ideas into practice in Poplar, London, in the
mid-1840s. The main feature of these societies was their accessibility to
332
THE ASCENDANCY OF STERLING, 1789-1914
a poorer section of the community, for no interest was credited or
charged and the voluntary administrative work was unpaid. The houses
were sound, but small and cheap, and repayments were minimal.
Weekly subscriptions as low as 91Ad. (or 4p) were charged until a house
was allocated - by ballot - after which, a higher charge, just like a rent,
of 8 shillings (40p) was payable until the total debt of the bare capital
value of the house without interest (based on £200) was repaid.
Bowkett's idea was taken up so enthusiastically by Richard Benjamin
Starr, - who flamboyantly promoted the concept for personal profit -
that over 1,000 Starr-Bowkett societies had been set up by 1892. The
Chief Registrar had always been hostile to the gambling element of
these societies, a feature enhanced when persons lucky enough to gain
an early allocation for a house sold out at a premium, while in many
cases cash prizes rather than actual mortgages were issued to winners
of the ballots. Consequently both the Registrar and the Building
Societies Association, keen to preserve the reputation of their members,
were pleased to see the prohibitive clauses inserted into the 1894 Act.
The effect of this prohibition was further to reduce the number of
terminating societies. The principle of the best balloting societies was
simple, but the practice became complicated, particularly in an
increasingly mobile society when the luckiest members had already
been satisfied, and the initial faith, hope and charitable enthusiasm had
given way to a prolonged anticlimax of resigned and reluctant re-
payment.
Another experimental type of society tried to combine the rising
popularity of deposit banking with normal building society operations.
By far the most prominent of these was the Birkbeck Building Society
registered in 1851. Right from the beginning its founder, Francis
Ravenscroft, decided that 'at least three-quarters of its deposits should
be invested in Consols or other convertible securities'. Its banking
business, including the issuing of cheque-books, had grown to such an
extent that by 1891 it was reckoned by The Economist to be the sixth
largest bank in Britain. Little wonder therefore that the Bank of
England decided to come to its rescue when it suffered a run following
the Liberator crash in 1892. Nevertheless its days were numbered, for
with excessive investments in gilts it was always vulnerable to
abnormally high withdrawals at any time when the capital value of such
investments happened to be low. This was just the state of affairs when
the failure of the Charing Cross Bank in September 1910 led to another
run on the Birkbeck in October. Despite its long struggle to hold out it
was eventually forced to suspend payment in June 1911. 'Throughout
the years of its prosperity it was known as the Birkbeck Bank ... on its
THE ASCENDANCY OF STERLING, 1789-1914
333
collapse it immediately became known as the Birkbeck Building
Society' (J. S. Price 1958, 363). This again undermined public
confidence which had hardly recovered from the Liberator crash.
Societies in general underwent a considerable decline in membership,
and a complete recovery was not attained until after the First World
War. The history of the Birkbeck may go far to explain the stubborn
reluctance which persisted for ninety years thereafter in Britain
regarding the degree to which building societies should be allowed to
compete with banks by providing some banking services - a burning
issue again in the 1980s and 1990s. The year 1895 saw the official
agreement — the Composite Agreement — between the Inland Revenue
and the Building Societies Association which allowed the societies to
pay a composite tax based on a sample of the incomes of their
investors; and since many of these were too poor to be assessed for
income tax it followed that the composite rate was lower than the basic
rate - thus giving the societies, in the view of bankers, an unfair
advantage, which again persisted for over ninety years. In contrast to
the centralizing cash flows of the banking system, the main body of the
building societies gathered their savings locally and invested them
locally, even if these investments were mainly in the relatively
unproductive form of housing, a bias officially encouraged by the
composite agreement which laid the seeds of greater distortion in the
higher tax regime of the twentieth century, providing a partial
explanation for Britain's long-term relative industrial decline, and an
unintended blemish on the success story of the building society
movement. Investing in industry has for a century or more in Britain
been penalized compared with investing in housing.
The savings banks: TSB and POSB
Oliver Home, the unrivalled historian of savings banks, fully justifies
the conventional claim that the Revd Dr Henry Duncan, 'the amiablest
and kindliest of men', should rightfully be reckoned as the 'father of the
savings bank movement' in Britain and in many countries abroad, a
claim more recently confirmed by the Page Report of the Committee to
Review National Savings (Cmnd 5273, June 1973). Earlier examples of
savings banks exist before 1810 in Britain and abroad: the Sunday
Banks have already been noted, while a more worthy claim for
precedence may at first sight seem to exist in the Tottenham Benefit
Bank opened by Mrs Priscilla Wakefield on 1 January 1804, to receive
the savings of all and sundry, rather than being in the main confined to
church and chapel members, as was the case with the Sunday banks. In
Scotland the West Calder Friendly Bank, founded by the Revd John
334
THE ASCENDANCY OF STERLING, 1789-1914
Muckersy in 1807, successfully preceded Duncan's example by three
years. The earliest continental example, the Hamburg Institution was
founded in 1778, but was more in the nature of an annuity institution
than a savings bank. The savings banks set up in Berne in 1787 and in
Zurich in 1805 - the latter having the longest continuous history among
European savings banks - had little influence beyond their own
localities, whereas Duncan's experiment quickly became imitated
worldwide. Thus while there is no doubt that a number of examples can
be found on the Continent and in Britain of institutions which handled
small savings before 1810, 'the British savings banks seem to have been
the first to be systematically established on a national basis' (Home
1947, 88). The founder of the French savings banks, Benjamin Delessert,
had studied in Edinburgh and never disputed the fact that he had copied
the British idea; while in Holland the Workum (1817) and Rotterdam
(1818) Savings Banks were the direct result of following the Edinburgh
model described in a Dutch translation of an article in the Edinburgh
Review of 1815, which gave instructions on just how to set up such
banks. Since the new banks were the children of the social conditions
brought about by the world's first industrial revolution, it was natural
that British preachers and philanthropists should have been prominent
in providing parental leadership in creating a nationwide system of such
banks.
Henry Duncan was born near Kirkcudbright and educated at
Dumfries Academy and, with interruptions, at three of the old Scottish
universities. After leaving St Andrews at the early age of fourteen he
worked in Heywood's Bank in Liverpool for three years, but being
determined to enter the ministry he returned to study at Edinburgh for
three years and at Glasgow for a further two. In 1799 he became
minister of the kirk for the small and poor parish of Ruthwell near
Dumfries at a stipend of less than £100 a year. In 1809 he founded and
edited the Dumfries and Galloway Courier in which he expounded his
concept for a kind of savings bank where the poor would receive strong
encouragement for sustained saving combined with obvious security
and with the discipline required to discourage too easy withdrawal of
deposits. He determined to practise what he preached, putting his
theories to the test by opening the Ruthwell Savings Bank in May 1810,
convinced that if it could be made to succeed in such a small and poor
parish, it would thrive anywhere. Deposits from £1 to £10 were
accepted, but interest was paid only on whole pounds, at a rate of 4 per
cent, rising to 5 per cent after three years. As with Friendly Societies,
trust-inspiring community leaders such as the Lord Lieutenant, Sheriff,
and local MPs were enrolled as honorary members. After the first year
THE ASCENDANCY OF STERLING, 1789-1914
335
total deposits had risen to £151, and by the end of 1814 they had
reached £1,164. The good minister was delighted, and his many friends
and his very few enemies were convinced, for by this time its success
had been widely noted and plans for copying it were being drawn up in
Scotland and elsewhere. In December 1813 the Edinburgh Society for
the Suppression of Beggars established in that city a savings bank with
rather simpler rules than Dr Duncan's strict constitution, so that
subsequent imitators had a choice of two good models, which could be
modified to suit local circumstances and preferences. By the end of 1815
almost all towns of any size in Scotland had their own savings bank. In
England and Wales the need was just as great but there were barely half
a dozen such banks in 1815. There was however such a ferment for
establishing such banks that in 1816 seventy-four were set up in
England, four in Wales and four in Ireland. It was clearly time to see
that their legal position was assured, and not simply assumed as an
extension of the Friendly Societies Act of 1793. It was most fitting that
George Rose, initiator of that Act was also mainly responsible, in his
dying years, for this new legislation on which the savings bank
movement in Britain was founded.
George Rose - another Scot - was born in Brechin in 1714. He joined
the Royal Navy as a boy and, having been twice wounded in action, was
invalided out of the service when just eighteen. He then entered the civil
service as a humble clerk and rose steadily to become a Member of
Parliament, Vice President of the Board of Trade and Treasurer of the
Navy. His philanthropic energy was boundless, even towards the end of
his life when he became determined to see that the savings bank
movement should be built on a sound legislative basis. Despite the
vociferous opposition of radicals like William Cobbett, Rose's Savings
Bank Act received the Royal Assent on 12 July 1817. The three
fundamental provisions of the Act were, first, that each bank had to be
under the (undefined) supervision of an honorary board of trustees;
secondly, all the accumulated savings surplus to the everyday working
requirements of the bank had to be invested with the National Debt
Commissioners, for which purpose a 'Fund for the Banks for Saving'
was opened in the Bank of England; and thirdly, the rate of interest
allowed on this fund was fixed by the government. These three
principles were to become matters of continuing controversy
throughout the century and beyond. Following the Act the growth of
savings banks 'was one of the most rapid and spontaneous movements
in our social history' (Home 1947, 81). At the beginning of 1816 there
were only six savings banks in England and Wales. By the end of 1818
there were 465 separate savings banks in the British Isles; 182 in
336
THE ASCENDANCY OF STERLING, 1789-1914
Scotland, 256 in England, 15 in Wales and 12 in Ireland. Some banks
had as many as eighty honorary 'trustees' or 'directors' or 'managers'
busily encouraging thrift, and by 1847 the Trustee Savings Banks had
amassed just over £30 million of small savings, with only one really
significant pause in their steady growth - during 1826 following the
panic of December 1825; but even in this instance there was only a net
fall of £120,000 out of a total value of £15 million in deposits, and this
fall was quickly restored in the following year.
Nevertheless, despite these impressive statistics of success, all was
not well, as is attested by a series of frauds, investigations and remedial
Acts of Parliament, seven such Acts being passed between 1818 and
1844. Of the many frauds, that of Cuffe Street, Dublin, which came to
light in 1828, was important in highlighting the problem of the proper
degree of responsibility assumed by trustees. Mr Tidd Pratt, who in
1828 was appointed as the Certifying Barrister for Savings Banks, and
looked into the Cuffe Street affair, gave his opinion that trustees were
unlimited in their liabilities unless their certified rules had expressly
stipulated such a limitation. Almost all the banks formed up to then
had carried no such written limitation in their rules. There was
therefore an imminent danger that the savings bank movement would
be destroyed by the wholesale withdrawal of trustee support. However
this danger was averted by the Savings Bank Act of 1828, when the
liability of trustees was limited to 'their own acts and deeds where
guilty of wilful neglect or default'. The same Act also reduced the rate
of interest paid by the Debt Commissioners from 3d. to 2xAd. per day
per cent, a reduction from the originally generous 4.56 per cent per
annum to 3.8 per cent. There was a great deal of controversy, led by
Cobbett and fed frequently by The Times, against such generosity by
the state made, it was alleged to the rich more than to the poor, for the
rich could open a number of accounts (despite apparent safeguards
against this) and save up to the maximum limits, whereas many savings
banks did not start paying any interest until a minimum amount, say
125. 6d., had been deposited, obviously by those who were quite poor.
In the 1820s the return on Consols was about 3.75 per cent, so the
Commissioners of the Debt were running a deficit on their 'Fund for the
Banks for Saving'. Supporters of the Savings Banks argued strongly that
the poor needed the encouragement of a small subsidy especially since
this would relieve the poor rates. Furthermore whereas the large and
wealthy Scottish commercial banks paid their depositors, including
their savings bank customers, interest on their accounts, English banks
did not do so, at least to any extent; therefore it seemed right that the
state had to step in. Figures given by Mr Home of the distribution of
THE ASCENDANCY OF STERLING, 1789-1914
337
savings among various classes of depositors show that in fact the great
majority were servants, labourers, small farmers and small tradesmen.
Thus some 615 of the total 670 depositors in the York Savings Bank in
1817 were as described, the largest number, 332, being servants.
Nevertheless whenever there was a scandal, new attempts were made by
opponents to reduce the rate of interest paid and the maximum amount
of individual deposit; as again in 1844 when the Savings Bank Act of
that year reduced the rate payable to trustees to 3.25 per cent and
stipulated that the maximum rate that any trustee savings bank could
pay to an individual depositor should not exceed £3. 05. lOd. per cent.
Even so the Savings Bank deficiency remained 'a bogy constantly
resurrected by the critics of savings banks for fifty years or more'
(Home 1947, 162). Further strong ammunition for such critics was
supplied by the case of the failure of the Rochdale Savings Bank in
November 1849, when it came to light that its actuary, Mr George
Haworth, had managed to defraud the bank of the huge amount of
£71,715 over the years, almost three-quarters of the total savings of the
poor townspeople of Rochdale. This fraud was the largest of some
twenty-two cases of fraud that came to light between 1844 and 1857.
Opinion was hardening against the trustee savings banks in favour of
some other forms of savings, such as co-operation - in which Rochdale
led the way - and also resurrected older ideas of a post office bank.
In 1859 a Huddersfield banker, Mr C. W. Sikes, despairing of ever
getting his pet Postal Savings Bank idea officially accepted, determined
to cut through the red tape by writing directly to the Chancellor of the
Exchequer, Mr Gladstone, craftily explaining the moral significance as
well as the mechanics of his scheme. Gladstone was highly receptive of
the main part of Sikes's plan, for he shared his disillusion with the
trustee savings banks. In 1861 a large number of the 638 TSBs then in
existence were small, insecure and incompetently managed. Some 300
of them managed to open for business on only one single day each
week, while their geographic coverage was very patchy, especially in the
south of Britain. In contrast, Sikes planned a secure, nationwide
network for, as he stated in his letter to Gladstone, 'Wherever a Money
Order Office is planted let the Savings Bank be under its roof . . . and
you virtually bring the Bank within less than an hour's walk of the
fireside of every working man in the Kingdom' (Davies 1973, 55).
The huge sums which could thus be placed at the disposal of the
government at the cheap rate of only 2V2 per cent appealed strongly to
two sides of Gladstone's character - his love of economy and his dislike
of the big banking interests in the City. 'It was only by the establishment
of the Post Office Savings Banks and their progressive development that
338
THE ASCENDANCY OF STERLING, 1789-1914
the finance minister has been provided with an instrument sufficiently
powerful to make him independent of the Bank and City power when he
has occasion for sums in seven figures' (Morley 1911, III, 43). Little
wonder that Gladstone opposed Sikes's original plan to set up an
independent commission for investing the proceeds of the POSBs. The
unquestioned security offered by the government had to be paid for by
giving the Treasury complete control over investment - and at a rate lk
per cent below that then offered to the TSBs. It took another TSB
failure, that of the Cardiff Savings Bank in April 1886, to set in train a
series of steps by which the rates of interest, maximum holdings and
other such technical matters were harmonized between the two sets of
savings banks. The TSB movement was shaken to its foundations by the
failure of the Cardiff Bank, which brought down the Bristol Savings
Bank, led to fatal runs on a number of other such banks as far afield as
Yorkshire and Kent and caused three London savings banks to fail also.
Huge amounts were transferred to the POSBs. When cheap money in
1888 enabled Goschen to convert £40 million of the national debt from
3 to 2V2 per cent, advantage was taken to press the rate for TSB
depositors similarly downwards to the 2V2 per cent level, thus ending a
period of twenty-seven years in which the TSBs had enjoyed a Vi per
cent premium when compared with the POSBs. Nevertheless the much
greater convenience, longer opening hours, better administration and
above all the superior security of the POSBs guaranteed the greater
success of the latter during the period from its formation in 1861.
Whereas the total deposits in TSBs which had totalled £41.7 million in
1861 fell to £36.7 million by 1866 and rose only slowly to an undulating
plateau of around £41 million to £46 million for the next twenty years,
already by 1870 the POSB had deposits of £15 million, rising to nearly
£51 million to equal those of the TSBs in 1886 when the Cardiff TSB
failed. In the next four years 101 TSBs closed, mostly voluntarily, with
depositors transferring nearly £5 million to the POSB - except in
Scotland, where the TSBs such as that of Glasgow, the country's largest,
remained strong. Eventually 'Rollit's Act' of 1904 re-established the
TSBs in the country as a whole on a sounder basis; but by then the
superiority of the postal banks as the favourite recipient of working-
class liquid savings was unchallengeable.
Although the penny banks, with the exception of the Yorkshire
example, never amounted to very much, they deserve at least a brief
mention, partly because they introduced the very poorest and youngest
of customers into the savings and other banks. Perhaps the earliest
British example is that established by Mr J. M. Scott of Greenock in
1847 as a nursery for the 'parent' Greenock Savings Bank. In England it
THE ASCENDANCY OF STERLING, 1789-1914
339
was the father of the POSB, Mr Sikes, who as early as the 1850s
established a number of penny banks in Mechanic Institutes in and
around Huddersfield. His ideas inspired Colonel Edward Ackroyd to
open the most successful of all such banks, the Yorkshire Penny Bank,
on 1 May 1859. By 1865 it had accumulated savings of £100,000,
reaching £1 million by 1884 from 140,000 accounts. By 1900 its total
deposits had reached £12.5 million.
A most useful supplement to the narrow range of services provided
by the savings banks was the introduction by the Post Office of the
Postal Order in 1881, as an alternative to the issue of 'Post Office
Notes', which would have been rivals of the commercial banknotes. The
suggestion that the Post Office should issue banknotes (put forward by
the Committee on Postal Notes in 1876) was rejected, and the much
weaker version of a postal order system was eventually introduced some
five years later. It was an immediate success, for nearly 4'A million
orders to a value of over £2 million were issued in 1881. For the
following ten years postal orders were used as currency in some areas.
By 1907 the annual number of postal orders issued had passed the 100
million mark and represented a value of £43 million.
Generally speaking, no credit was made available by any of the savings
banks for their customers, who could obtain access only to moneys they
had themselves previously deposited. A number of Clothing and Rent
Societies, Slate Clubs, Christmas and Holiday Clubs managed to provide
a very limited and tightly controlled amount of credit to their members.
The working classes as a whole had to await the coming of consumer hire
purchase to gain specific and limited amounts of credit. Bank credit
remained the privilege of the relatively richer customers of the com-
mercial banks. Nevertheless, starting from a negligible amount at the
beginning of the century, working-class savings had shown a remarkable
growth to approach some £500 million by 1914, of which the greater part
consisted of deposits in the POSB, at around £182 million; TSB deposits
totalling £71 million (of which £54 million was in ordinary deposits and
£17 million in investment and other accounts); Friendly Society Deposits
came to over £67 million, with the rest in the penny banks and in the
various clubs and insurance societies. Most of these savings, like those of
the amalgamated banking system as a whole, were being drained from all
over the country to centralized governmental or private sector head-
quarters in London, to be redistributed to the provinces or abroad as the
bankers and administrators in the City thought fit. It was the discount
houses and the merchant banks that played leading roles in this financial
redistribution process. Working-class savings supplied a steadily rising
rivulet into the lake of City liquidity.
340
THE ASCENDANCY OF STERLING, 1789-1914
The discount houses, the money market and the bill on London
The discount houses were so called from what has been their distinctive
but never their sole activity for the greater part of their pertinacious
existence, namely the purchasing of bills of exchange at a discount or
lower value from their nominal or terminal price and either holding
them to maturity or selling them to other dealers in bills. Because bills
perform three functions — they transmit funds, they provide credit and
they supply holders with a most convenient and highly liquid reserve -
the discount houses, as wholesale dealers in bills, came to occupy
literally and figuratively a central and strategic role in the London
money market, and hence in domestic and international finance.
During the latter quarter of the eighteenth and the first quarter of the
nineteenth centuries bills of exchange (as we have already noted) were
also used as currency in London and even more so in parts of
Lancashire and Yorkshire, until banknotes and cheques took their
place. As the volume of bills handled multiplied during the nineteenth
century so the 'bill on London' assumed a role whereby bilateral trade
between countries far distant from London, such as the woollen trade
between Sydney and Tokyo, became dependent upon the smooth
functioning of the discount market. Short-term money rates were
immediately affected by the demand and supply of bills, as were the
liquid reserves held by the amalgamated banking system, during the
last quarter of the nineteenth century. The government itself was so
impressed with the advantages of bill finance that it developed its own
Treasury bill for meeting its own short-term needs, flatteringly in direct
imitation of the London money market's bill of exchange. Because of
the key position held by the discount houses the Bank of England had
found it essential to grant them special, and for most of the time, exclusive
privileges in rediscounting their bills. These impressive operations were
performed by one to two dozen houses employing a skilled and
adaptable, but surprisingly small number of employees, of about 300 to
400, situated mostly in and around Lombard Street. Mr W. T. C. King,
in his History of the London Discount Market, is not guilty of exag-
geration in pointing out that 'from the days of Bagehot to those of the
Macmillan Committee successive authorities have recognized that it is
to her possession of a specialized discount market that London largely
owes her supremacy as an international financial centre' (1936, xi).
The development of the discount houses in the nineteenth century
may be conveniently divided into two periods, the first up to the failure
of the City's largest house, Overend and Gurney in 1866. During this
period it was the domestic bill that predominated. In the second period,
THE ASCENDANCY OF STERLING, 1789-1914
341
from 1866 to 1914, the decline of the domestic bill was more than
compensated by the vast increase in the importance of the international
bill on London. After the domestic bill first obtained legal status in
1697, its growth was gradual until the 1780s, when it grew to be used so
rapidly that by 1800 bills had become the normal method of payment
between traders and, in the absence of overdrafts which had not by then
been discovered in England, and in the relative rareness of loans, bills
were thus also the normal method of obtaining short-term credit from
the hundreds of banks that were by then covering the country. Country
banks with surplus funds invested them with their correspondent banks
in London who used such funds for investing in bills not just in London,
but also for purchasing the bills raised in the deficit districts in the
industrial areas of the country. The growth of the economy was thus
reflected in and facilitated by the growth of the London bill brokers,
some of whom began to withdraw from general banking business in
order to concentrate on bill broking, the first such 'true' bill dealer
being Richardson and Gurney, formed in 1802 and joined by Overend as
partner in 1805. Until about 1817 the London brokers and the country
bankers all charged the same rate of discount - 5 per cent - the
maximum then allowed by law, but from then until the end of 1825
there was a glut of money, particularly in London, stimulated by the
excessive issue of small notes. London brokers during that period began
to compete by reducing their rates of discount, causing industrialists in
the country to use the London brokers rather more than their local
banks for discounting.
Until the 1826 crisis the London bankers had relied on being able to
gain immediate access to cash whenever required by rediscounting their
bills with the Bank of England, but as a result of the crisis the Bank
ended this facility, limiting the privilege only to the specialized bill
brokers, further stimulating their growth. The rise of joint-stock banks
after 1826 and the stricter limitation of note issuing meant that bill
dealing was again encouraged. In economic function bills and notes
were virtually interchangeable, so that whereas amalgamating or
opening a London branch might entail loss of note issue, there was no
such bar to issuing more bills. The Bank of England itself aggressively
competed in bill discounting until it recognized that it was partially to
blame for the 1847 crisis after which it toned down the fervour of its
competition, beginning to learn that the 1844 Act had not completely
liberated its Banking Department from the growing responsibilities of a
central bank. It could not be both poacher and gamekeeper. It was
during this period, 'roughly from about 1830 until the 'sixties or
'seventies, that the bill market as an agent for the domestic distribution
342
THE ASCENDANCY OF STERLING, 1789-1914
of credit reached its highest point, in terms both of the scale of
operations and of importance in the body economic' (W. T. C. King
1936, 41). In their zeal to assist domestic (and external) trade, and in
contravention of the lingering belief in the 'real bills doctrine', discount
houses like Overend and Gurney began issuing large amounts of
'accommodation' or 'finance' bills, even for financing fixed capital such
as railway building. Economic difficulties following the outbreak of the
Crimean War in 1854 rose to crisis point when the news of the Indian
mutiny of May 1857 reached London, again causing the discount
houses to rediscount exceptionally large amounts with the Bank of
England, so draining it of reserves that the 1844 Act had again to be
suspended, and a legally exceptional issue of £928,000 of notes was put
into circulation.
There followed ten years of strained relations between the discount
houses and the Bank of England, which latter showed its teeth in the
'Rule of 1858' by which the Bank reversed its decision of 1825. No
longer were the discount houses to be allowed in the normal course of
business to have rediscount facilities at the Bank - a retrograde step
which prevented the Bank from keeping an oversight on the quality of
the bill business of the houses at a period when such a brake on the
activities of houses like Overends would have been most salutary.
Suspicion and spite were mutual. In 1860 in a single day Overend and
Gurney withdrew £1,650,000 from the Bank, all in £1,000 notes, thus
forcing the Bank to raise bank rate to 5 per cent. (The Bank
remembered this action and stood aloof in 1866, leaving Overend to fall
— a victim of its own excesses.) The general movement during this
period towards limited liability led to the formation of a number of
joint-stock discount companies, the first of which was the National
Discount Co. Ltd, formed in February 1856, followed by the London
Discount Co. later in the same year, and by the General Discount Co. in
the next year. Both the latter were to fail after a short and troubled
existence, the London Discount Co. being involved in June 1860 in the
'leather crisis', in which no fewer than thirty leather firms collapsed
with liabilities of around £3 million. Overend and Gurney were also
involved, but managed to weather the storm. Half a dozen other
discount company formations followed before Overends themselves
became a limited company in July 1865, a decision described by the
Bankers' Magazine of the time as the 'greatest triumph of limited
liability'. The triumph was short-lived. After heavy withdrawals in the
first months of 1866, the crisis came with a legal decision questioning
the status of the company's securities in the Mid-Wales Railway, and
hence the value of its heavy involvement in other railways also. By the
THE ASCENDANCY OF STERLING, 1789-1914
343
next day, 10 May 1866, Overend and Gurney, the world's biggest and
best-known discount house, had suspended payment, with debts of over
£5 million.
The repercussions were immediate and spectacular, but surprisingly
not widespread beyond the City. Bank rate was pushed up to the
unprecedented rate of 10 per cent, but at that rate the Bank discounted
freely. Among the banks, the English Joint Stock Bank of London and
the Agra and Masterman Bank were the two most important of seven
that eventually failed. Fortunately for the rest of the economy the crisis
remained mostly financial, and despite the ruinously high rate of
interest commercial failures were relatively few. The Chancellor's letter
again allowed the Bank of England to exceed the fiduciary note issue's
normal limits, but this time, as in 1847, no excess notes were actually
issued. In the course of time calm was restored and bank rate was
brought down in July 1867 to the remarkably low level of 2 per cent, a
level only previously touched on just two occasions (April 1852 and July
1862). Although most of the discount houses incurred heavy losses, the
National Discount and Alexanders the two largest after Overends,
escaped relatively unscathed. Overends' fall seemed to open the door
for a number of new entries to the discount market with partnerships
like Gillett's, Sanderson's and Shaxson's being among the most
prominent of eleven new private houses formed between 1866 and 1870.
In terms of size the Union Discount Co. which had absorbed the
General Credit Co. in 1885 was the first of the 'Big Three' to reach
deposits of £10 million - in 1894, a position not achieved by the
National until 1904 nor by Alexanders until 1913. By the latter year the
total deposits of the Big Three, now consisting mainly of call money
placed by the head offices of the amalgamated banks in the City, came
to £46.6 million, double the total reached in 1891. By 1913 there were
also some twenty private discount houses together with a dozen or so
money brokers who fed the houses with business, which by then
included only a negligible amount of domestic bills.
Although the decline in the inland bill may, according to King, have
begun as early as the 1857 crisis it did not become very significant until
after the 1866 crash, the decline accelerating markedly in the 1880s and
1890s. The three main, connected reasons for its decline were, in
chronological order: first, the revolution in transport and com-
munications; secondly, the resulting reduction in the need for
merchants to hold their customary vast stocks of goods, a costly
necessity previously; and thirdly, the amalgamation movement in
banking. Already by 1880 Gillett's dealing was mostly in overseas bills
and by 1905 their country business had declined to a 'negligible
344
THE ASCENDANCY OF STERLING, 1789-1914
percentage' (Sayers 1968, 45). Professor Nishimura, in his study of 'The
Decline of Inland Bills' has emphasized the fact that 'Inventory
investment . . . must have been a great burden on the money market'
until after the 1870s when 'telegraphs and steamers' not forgetting
internal railways 'did away with both the enormous amount of
inventory of goods and the middlemen merchants. Branch banking
absorbed money into the banking system. Thus the demand for money
for inventory finance dwindled and the supply of money increased,
enabling banks to lend in the form of overdrafts, which in turn caused
[inland] bills to decline' (1971, 78). The amalgamation movement of
the 1890s provided the final, culminating pressure to a decline that
was already well on the way. The discount houses, always adaptable,
took this decline in their stride, by new dealings in Treasury bills, and
even more importantly, by vastly increasing their international bill
dealing.
In 1877 the Chancellor of the Exchequer, Sir Stafford Northcote,
annoyed with the unpopularity of the Exchequer bill as a means of
raising short-term finance, asked the advice of Walter Bagehot, editor
of The Economist and author of the classic Lombard Street. Bagehot
suggested a short-term security 'resembling as nearly as possible a
commercial bill of exchange'. His idea was incorporated in the
Treasury Bills Act, 1877. Originally the bills could be used only for
finances authorized under the Consolidated Fund, but from 1902 the
purposes for which they were permitted were widened, so that the
volumes outstanding were considerably increased, reaching a pre-war
peak of £36,700,000 in 1910: a preparation for their massive use in the
First World War and subsequently. This offered more London-based
grist for the discount houses' mills, and even for foreign financiers who
were substantial purchasers of Treasury as well as of commercial bills.
By 1890 the Bank of England had re-established the traditional privilege
by which the discount houses enjoyed almost automatic rediscounting
with the Bank. Once the crisis of that year (shortly to be examined) had
been overcome, 'the organisation by which all free British capital was
sucked into the London money market was functioning almost
perfectly ... a smooth channel had been cut down which the aggregated
northern surpluses flowed south. The channels from East Anglia, the
South West and rural England generally, had been cut long before'
(Scammell 1968, 166, quoting Sir John Clapham).
The call money which the banks loaned to the discount houses was
now being almost entirely used in the finance of Treasury bills and,
above all, international bills. London had become a truly international
market much more powerful than the foreign centres with which it was
THE ASCENDANCY OF STERLING, 1789-1914
345
in hourly contact. By the first decade of the twentieth century 'the most
active and powerful factors in it are of foreign origin' with 'foreign
interests to serve, which may frequently clash with British interests'. This
was the view of W. R. Lawson, writing in the Bankers' Magazine oi 1906
(King 1936, 282). The London merchant bankers had almost always
been even more myopically international in their vision than the
discount houses for whom they 'accepted' a large proportion of their
bills. Only the building societies escaped the powerful centripetal pull of
the City; and even they of course did nothing to finance local industry.
The seeds of future industrial decline, relatively speaking, were being
widely sown during the period of sterling's unchallenged supremacy.
The merchant banks, the capital market and overseas investment
Merchant banks, like elephants, are difficult to define but instantly
recognizable. Most merchant banks began as merchants and expanded
into banking, but movement the other way was not uncommon. 'Scratch
an early private banker and you will find a merchant' (Carosso 1987, 3).
Because of their mixed origins and functions the term 'merchant bank'
has 'no precise meaning, and is sometimes applied to merchants who are
not bankers, to bankers who are not merchants, and even to Houses
which are neither merchants nor bankers'. This is the considered view of
Baring Brothers, who, if anyone, should have known what a merchant
banker was (Baring Brothers 1970, 9). Most merchant bankers in Britain
came originally from overseas; from Germany especially, such as the
Barings, the Brandts, the Hambros (formerly Levys), the Kleinworts, the
Rothschilds, the Schroders and the Warburgs; but also from Holland,
like the Hopes (originally from Scotland) and the Raphaels; and from
the USA, such as Brown Shipley, the Seligmans, and the Morgans (from
Wales, via Bristol and New England, back to London). Not surprisingly
therefore in experience, outlook and interests they remained
predominantly international, as if created to be the ideal catalysts of
international trade and development. With a number of important
exceptions, such as the Barings and the Morgans, most were Jewish, for
the international nature of their business naturally attracted Jewish
bankers. Twenty-four of the thirty-one merchant bankers who died as
millionaires between 1809 and 1939 were Jewish.
As merchants, whatever their origin, they were used to buying and
selling in substantial amounts on their own account, a skill they readily
sold to other wholesalers and manufacturers. Their knowledge of the
credit standing of foreign traders, acquired through long, painstaking,
personal or family involvement, was put directly to use in arranging
346
THE ASCENDANCY OF STERLING, 1789-1914
loans and purchases; and indirectly by the important development of
their 'acceptance' of bills of exchange, their endorsements greatly
enhancing the saleability of bills, enabling issuers to quote much finer
i.e. lower rates. The merchant banks thus played an indispensable role
in building up the unrivalled reputation of the bill on London.
In the same way, the mere knowledge that the merchant banks were
associated in raising capital, whether for foreign railways, mines,
harbours, bridges, canals or waterworks, and so on, was normally
sufficient to guarantee that the general public in Europe (and later in the
USA) would eagerly take up such loans at a greater speed and at higher
prices than would otherwise have been the case. The influential
borrowers could thus afford to be generous in their rewards - monetary,
social or political - to the merchant bankers, thus contributing to other
reasons (examined below) for pushing City money in a biased fashion
towards overseas rather than home investment. Perhaps the most
powerful influence of the merchant bankers is to be seen in arranging
loans for governments and for propping up kings, princes and potentates
in the anachronistic ways of life to which they could not afford, either
politically or financially, to have become accustomed. Because the
achievement and maintenance of the highest esteem, trust and prestige
are essential ingredients of true merchant bankers, their economic and
political influence became inextricably intermixed, their political
influence facilitating their economic deals, while their economic weight
enabled them to intervene strategically on a number of occasions in
international politics. Thus Count Corti, in one of the earlier examples
of what has become a deluge of dynastic histories, stated that 'the object
of this work is to appraise the influence of this family [the Rothschilds]
on the politics of the period, not only in Europe, but throughout the
world' (Corti 1928, 11). Brief glimpses of the salient features of the two
leading houses, the Barings and the Rothschilds, must suffice to give an
inkling of the fascinating, controversial and economically strategic
history of the merchant banks in general.
The Baring family, originally woollen merchants in north Germany,
first became associated with England through importing wool, mainly
from the West Country. John Baring, son of a Lutheran minister in
Bremen, was sent to Exeter in 1717 where he married into a rich local
family and rapidly expanded his business. His sons moved to London,
where they set up their merchant banking business, 'John & Francis
Baring & Co.' in 1762. By the beginning of the war in 1793, Barings had
already become one of the strongest houses. When Hope and Company,
fearful of their future, fled to London to escape from the French
invasion of Holland in 1795, they were befriended by Barings. In return
THE ASCENDANCY OF STERLING, 1789-1914
347
their mutual links with the USA were considerably strengthened. By
1803 almost half the $32 million of US stock owned by foreigners was
held in Britain, with Barings being very heavily involved. In the same
year Napoleon, being hard-pressed for cash, offered to sell the whole of
Louisiana to the USA for $15 million. Even this bargain price was
beyond the immediate purchasing power of the American government.
However Barings and Hopes together were willing and able to advance
the money to Napoleon, and so the famous Louisiana Purchase was
successfully completed (despite the hostilities). Subsequently when the
Bank of the United States wished to set up an agent in London,
naturally enough it chose Barings. After the war ended in 1815 Barings
were active in sponsoring a huge loan of 315 million francs for the
French government. Hence arose the often repeated catch-phrase,
attributed to the Due de Richelieu, that there were 'six Great Powers in
Europe: England, France, Prussia, Austria, Russia, and Baring Brothers'
- a phrase used in the title of a recent official history of that house;
though even that author's meticulous research has failed to prove that
Richelieu ever did really utter that inspired remark (Ziegler 1988, 85).
Throughout most of the nineteenth century Barings still kept a wary
eye on opportunities for direct commodity trading, dealing in a wide
variety of products such as coffee, copper, indigo, rice, tobacco and
corn. They sometimes managed to make a 'corner', such as that in
tallow in 1831, and even challenged Rothschild for a share in Spanish
mercury in the 1830s and 1840s. Ziegler shows that the fact that Barings
were not Jews significantly affected, particularly in their formative
years, the people with whom they preferred to deal, and the countries in
which, from time to time, they specialized: though by the 1870s the
need for co-operation and the opportunities of a wider range of
business increasingly overcame ethnic loyalties. The larger merchant
banks did engage in some degree in long-lasting but never rigid
geographical specialization, such as the Hambros in Scandinavia, the
Rothschilds in Spain, and the Barings in Canada, but in the larger
markets of Russia and North and South America keen competition was
the rule. All the same, the minor degree of tacit separation of markets
reduced the number of occasions for head-on rivalry, and helps to
explain how in their hours of need, the main competitors were able to
co-operate closely and offer each other much-needed support - most
notably for Barings in 1890. Before examining that crisis, a brief
summary of Rothschilds' progress is appropriate.3
3 For a comprehensive and definitive analysis, see N. Ferguson, who with pardonable
exaggeration entitles his work Rothschild: The World's Banker (1998).
348
THE ASCENDANCY OF STERLING, 1789-1914
The Rothschilds originated in medieval Frankfurt on Main, their
house, in the days before houses had numbers, being aptly marked by a
red shield. They had enjoyed many decades of banking and
merchanting experience before Nathan Mayer Rothschild was sent to
Manchester in 1798 to deal in the thriving cotton industry. Nathan's
activities grew apace during the French wars (just like Barings), when he
was able to demonstrate his skill in transferring financial 'subsidies' to
the allies, and moneys to the armies abroad, quickly and in the correct
mix of currencies, using his family's network of couriers for this
purpose, and for gathering sensitive information generally more quickly
and reliably than other operators, whether banking competitors or
official sources. The London branch of Rothschilds raised over £100
million during the war for the allied governments. It was Rothworth,
one of Rothschild's agents (and not the fabled pigeon) that first brought
the news of Wellington's victory at Waterloo on 18 June 1815, to
Nathan Rothschild by the early morning of 20 June, some twenty-four
hours before the government's official envoy arrived in London. Rapid
information was obviously a valuable asset both for commodity trading
and for banking - and there was only jealous admiration rather than a
legal ban on 'insider' dealing in those days. On the other hand
merchant bankers often refrained from taking short-term advantage,
for the sake of building up a long-term, continuous relationship with
customers, the integrity, discretion and loyalty of merchant bankers
being thus built into a largely unwritten but most valuable, influential
and impressive 'code of conduct'.
In contrast to the wide range of commodities in which the Barings
traded, the Rothschilds normally confined themselves to the goods
traditionally traded in Europe by court Jews, namely diamonds, gold
and silver, and the mercury which was used, among other things, for
refining silver - hence the Rothschilds' early partial monopoly of the
mercury from Spanish mines. For most of the nineteenth century
Rothschilds were more important than Barings in bullion dealing,
foreign exchange and also in government loans in Europe; but Barings
always played the leading role in the 'bread and butter' bill-accepting
business and in loans to America. The senior Rothschild normally
became head of the Jewish community in Britain, while the
interconnections between finance and politics were further confirmed
by Lionel Rothschild's becoming the first Jewish MP, in 1858, and his
son Nathan the first Jewish peer, in 1885 - though in this rivalry they
did not quite match up with the Barings. By 1890 by far the most
prominent role in bill acceptance business in London was still handled
by Barings, with a total value in that year, despite the storm which
THE ASCENDANCY OF STERLING, 1789-1914
349
almost engulfed them in the autumn, coming to £15 million. Second
came Brown Shipley with £10.6 million; Kleinworts came third with
£4.9 million; Hambros fourth with £1.9 million; while N. M.
Rothschild could only manage fifth place with £1.4 million (Chapman
1984, 121). But Barings were about to be toppled from their perch.
The 'Baring Crisis' of 1890 is correctly so called, for without any
doubt it was the excesses of that house which led to the near-disaster of
that year; yet, if Barings had been left alone, like Overends in 1866, to
try to undo the consequences of their own folly, it would have become
everybody's crisis. As it happened, the unprecedented degree of timely
co-operation in the City, led by Lord Lidderdale, Governor of the Bank
of England, was so effective that it has been said that the significance of
the 1890 crisis lies in the fact that there was no crisis. By saving Barings
the City saved itself. In the previous decade Barings under Lord
Revelstoke had become grossly over-committed in South America in
general and in Argentina in particular. In 1880 the total value of British
investment in Argentina was £25 million. By 1890 nearly half of
Britain's external investment was to that country, by which date its total
value had risen to £150 million, and a 'strikingly large' proportion of it
was financed by Barings (Ziegler 1988, 236). The particular investment
that led most directly to Baring's difficulties was the failure of the
'Water Supply and Drainage Company' to complete its contract for
Buenos Aires in time or up to the designated standard. These financial
and commercial matters were further complicated when a revolution
broke out there in August 1890. By 24 November Barings were within
twenty-four hours of bankruptcy. By the next day Lidderdale brought to
fruition three days of frantic effort in securing promises of support
from all the major City banks. Not only did all the main merchant
houses, including Rothschilds (after a show of reluctance) give their
support, but, in addition to the £1 million promised by the Bank of
England itself, the London and Westminster, the London and County,
and the National Provincial Banks each offered £750,000. The final
total of the guaranteed sum came to £17 million. Thus armed and
pulling together, the City weathered the storm. Bank rate, which was
raised to 6 per cent in November was back down to 5 per cent in
December and fell to 3 per cent by the end of January 1891. The
economy was back to normal, though many lessons in central, deposit
and merchant banking were taught by the blistering experience of those
three months.4
Barings were so badly shaken that, despite their previous disdain for
limited liability, they followed the fashionable trend they had previously
4 See p. 676 below for the Barings crisis of 1995.
350
THE ASCENDANCY OF STERLING, 1789-1914
attacked by becoming a limited company. All the same, family
members, until 1995 (see p.676), continued to play the major role in the
company's affairs. Although Barings' fall had been caused by their
issuing activities, it was inevitable that their acceptance business, based
as it was on the indivisible attributes of esteem and indubitable credit,
also suffered gravely. By 1900 they had made a laudable degree of
recovery, handling in that year £3.9 million worth of acceptance
business, though this was just about a quarter of that of 1890. They had
been demoted to third place, behind Kleinworts with £8.2 million and
Schroders with £5.9 million. These latter were typical of the newer
generation of German houses which were now playing a more
aggressive and more energetic role in the London money and capital
markets than were the old-established families. They all shared however
in the great expansion of world trade and in the issuing of foreign loans,
which in the period 1890 to 1914 — though the total size has been revised
downwards by recent research - rose to heights which were unpre-
cedented and remain impressively substantial by any measure. Whereas
the role of London-based merchant banks in facilitating British exports
and world trade in general has received universal acclaim, their role in
exporting capital has remained a subject of much controversy
throughout the twentieth century, although the arguments sometimes
resemble attacks on sprinters for not engaging in marathons, or
blaming thoroughbreds for not making good cart-horses.
It was not for what they did but for what they failed to do that the
City's merchant bankers have been blamed; for sins of omission not of
commission. They have become the scapegoats for the alleged
weaknesses of the London capital market, in which they played such a
key role, for diverting domestic savings from home investment,
particularly in manufacturing industry, to overseas destinations. Any
harm to domestic investment would depend on a large number of
factors, including the actual size of such investment, whether savings
not invested abroad would have been invested at home, whether the
risks and returns were properly evaluated, whether the timing of
external investment coincided with or compensated for rises and falls in
home investment, whether the UK's total savings was a fixed amount
which determined the total amount of investment either at home or
abroad (what was later called 'the Treasury view') or whether it was
total investment which really determined what the total of savings
would be (that is the 'Keynesian view' available to writers after 1936). A
whole library of books, theses and papers has been written on this
compellingly attractive subject, chiefly because the period marks the
zenith of Britain's political and economic 'salt water' imperialism, in
THE ASCENDANCY OF STERLING, 1789-1914
351
contrast to the 'manifest destiny' of continental expansion in North
America, Russia and China. In recurrent surges throughout the
nineteenth century British capital was lured abroad, via the services of
the merchant banks, induced by generally higher rates of interest. The
Royal Commission on the London Stock Exchange (1877-8) explained
that the 'craving for high rates of interest' had been a 'leading cause' for
the export of enormous sums of money since the 1850s (Piatt 1984,
178).
The thorough and painstaking research of Professor Piatt has shown
that the basic statistics of British overseas investment before the First
World War, which have been almost universally accepted and endlessly
repeated for seventy years, were seriously at fault. Professor Paish's
original figures of the value of British overseas investment in 1913 came
to £4,000 million, of which £3,700 million was in portfolio investment
and £300 million in direct investment. Professor Piatt's revised figures
come to a total of only £3,130 million, of which £2,630 million was in
portfolio and £500 million in direct investment (1986). This gives a total
reduction from Paish's standard figures of £870 million or 21.7 per cent
- a considerable but not a shattering reduction, except perhaps for
those brave cliometricians who have built too heavy a load of complex
calculations on what was, before Piatt, taken too readily to be a firm
foundation. Further revisions, not necessarily in one direction, will
doubtless be published, though the most recent are not of course bound
to be the most correct (see Feinstein 1990).
It was not merely the size of foreign investment that benefited the
recipient countries, but also the fact that such investment was made in
sectors of the economy critical to the growth of such countries.
Furthermore the export of capital was accompanied by an export of
expertise in the form of an army of civil and mechanical engineers,
surveyors, professional, technical and skilled labour of all sorts that
together made the financial contribution very much more worthwhile.
Without such skills the financial seeds would have remained unwatered
and unweeded (as many twentieth-century examples show). 'The
United States was a prime beneficiary' of the work of London's
merchant banks; 'European capital, especially from Britain, accelerated
the pace of nineteenth century America's economic progress; and
English banking practices, most notably those of London's merchant
banks, influenced the organization of the country's financial system',
for bankers and banking skills closely accompanied the export of
finance (Carosso 1987, 12). In Australia, as Sir John Habakkuk has
shown, whereas smaller investments could be supplied from indigenous
savings, 'loans for large scale construction had to be obtained from
352
THE ASCENDANCY OF STERLING, 1789-1914
London' as was most long-term capital for Britain's colonies in general
(1940, II, 787). There was therefore much to justify the bias of the
London capital market towards overseas investment - and despite the
doubts of the revisionists, such a bias remains convincing. As Sir
Alexander Cairncross has rightly emphasized, the London merchant
bankers 'did not possess the apparatus of investigation necessary for
home industrial flotations, but were admirably placed for the handling
of loans to foreign governments and corporations . . . They were under
no temptation to dabble in home industrial issues (except the very
largest)' (1953,90).
Even in the latter half of the nineteenth century, one half or more of
investment in Britain's manufacturing industry came from ploughed
back profits. Of the rest, most came from investments made by friends
and relatives of the business, and some, where necessary, was financed
by the provincial stock exchanges. Most business was still small in
scale, too small to call for the services of the London capital market.
Private companies in 1913 still comprised nearly 80 per cent of the
existing total, and formed five-sixths of all new companies registered in
1911-13. But most of the British merchant banks for most of the time
avoided becoming embroiled in British industry even when opportunity
arose. Their attitude is exemplified in Lord Revelstoke's statement in
1911: 'I confess that personally I have a horror of all industrial
companies and that I should not think of placing my hard-earned gains
into such a venture', the venture being a coal product at a time when
coal was king (Ziegler 1988, 286). Barings, like the other merchant
banks, did all the same participate in the large issues in what Ziegler
calls the 'infra-structure of British industry', such as London United
Tramways and Mersey Docks and Harbour Board; in their minds,
hearts and interests they concentrated on overseas business. They were
financial extroverts.
In certain periods when foreign issues were at a low ebb the total of
home issues, counting provincial as well as London issues, considerably
exceeded that of foreign issues, e.g. during the period 1896 to 1903. But
an enormous surge of foreign investment again dominated the next
decade, rising to its highest peak in the years from 1911 to 1914. There
remained however a vital difference in that a considerable portion of
home 'investment' merely represented changes in the organization and
ownership of existing British businesses, from partnerships or private
company status into public limited company status, whereas overseas
issues mainly represented new, real, asset formation, further
strengthening its relative economic importance. (A lively debate on this
issue is to be seen in A. R. Hall versus A. K. Cairncross in Economica,
THE ASCENDANCY OF STERLING, 1789-1914
353
February 1957 and May 1958 respectively.) Thus although the merchant
bankers did from time to time handle a number of large home issues,
they did not much relish the business. At the close of the long
nineteenth century, as in the beginning, they remained predominantly
international in outlook. As Ziegler dramatically states, 'International
trade was their bread and butter; international loans their jam; the
financing of British industry was fare for the servants' hall, or worse
still, fit only for the dogs' (1988, 290).
This unenthusiastic attitude towards industrial investment,
particularly in the smaller, domestic, manufacturing industries -
Revelstoke's horror in attenuated form — permeated the City of London,
partly because of the general political and economic power of the
merchant bankers in Westminster and in City boardrooms, but
particularly because of their naturally heavy representation as directors
of other banks, including the Bank of England. As early as 1873 Walter
Bagehot pointed to bias in that merchant bankers like the Rothschilds
were invited to become directors of the Bank of England, even though
'they have, or may have, at certain periods an interest opposite to the
policy of the Bank' (1873, 226-7). Cunliffe (of that merchant banking
house), and Montagu Norman (of Brown Shipley) later became
Governors at key periods of the debate as to whether the international
interests of the City conflicted with the needs of the industrial regions.
It was in the couple of decades before the First World War that the seeds
of this division were being sown. It was the combination in timing of
bank amalgamation and the centralization of savings and decision-
making in London, coinciding with the surge of overseas investment,
that diverted savings in a biased manner from investment in
manufacturing at home to all sorts of investment abroad. The fact that
the industrial revolution took place later abroad at a time when the
Americans and the continental Europeans maintained their local and
regional banking structures meant that there were not such strong
centripetal forces elsewhere breaking the link between local savings and
local investment decision-making. Compared with the hundred or so
banks in the UK, with the Big Five already about to emerge, the USA
then had 35,000 separate banks, with the major European countries
similarly having large numbers of local banks dependent on the
prosperity of their own localities and with no one having a distant head
office to turn down their lending decisions, however risky for the banks
and however stimulating for local development. This overseas picture
was reminiscent of the earlier close connections between Britain's unit
banks and local industries. But Britain's centralized, amalgamated
banks could now, it was erroneously thought, leave investment in
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THE ASCENDANCY OF STERLING, 1789-1914
British industry to the stock market, and concentrate their own lending
on short-term commercial loans repayable on demand.
The deposit banks, with their imposing new headquarters, for most
of them, in the City, away from the smoke and din of the industrial
areas, no longer thought it their business to lend for plant and
machinery; while the merchant banks, being predominantly wholesale
bankers, could similarly wash their hands of the problem. Industrial
investment in Britain was not their problem; they had their hands and
purses full elsewhere. Professor Sidney Pollard authoritatively confirms
the view that 'the London capital market was simply not interested in
Britain', and although 'on some criteria the Victorians did right to
channel such a large part of their savings abroad, it is difficult to avoid
the conclusion that they must have contributed thereby, to an unknown
extent, to the deterioration of the British economic growth rate'
(Pollard 1989, 93, 114). Bankers and brokers steered Britain's savers to
'safe' investments abroad rather than towards more risky, pioneering
investment in the newer industries at home.
The City's bias abroad was officially reinforced by the Colonial
Loans Act of 1899 and the granting of trustee status to colonial stocks
in the following year, both acts reflecting Joseph Chamberlain's policy
of imperial preference. Dr Kennedy's researches also show that
because of the withdrawal during the mid-Victorian years of the British
banking system from the close relationship with domestic industry that had
developed over the previous century, by the late nineteenth century equity
markets were more important than they had ever been before. That they
were not adequate for the tasks that confronted them may be clearly seen by
the Victorian economy's stunted growth and marked inability either to
create or to exploit new technologies. (W. P. Kennedy 1982, 114)
Although, along with Beales, one may question whether 'the Great
Depression' in the two decades after 1873 was really as great as has
usually been assumed, and even concede that it was 'a period of
progress in circumstances of great difficulty', one must also admit the
obviously painful relative decline of Britain, as other countries such as
the USA and Germany developed more rapidly not only in a catching
up process but also with a pronounced bias towards new industries
(Beales 1954, I, 415). Furthermore, although the entrepreneurial sins of
omission blamed on our Victorian forefathers may commonly have
been exaggerated, they should not be dismissed as negligible. Donald
McCloskey's stirringly controversial article 'Did Victorian Britain fail?'
seems rather too laudatory in giving 'a picture of an economy not
stagnating but growing as rapidly as permitted by the growth of its
THE ASCENDANCY OF STERLING, 1789-1914
355
resources and the effective exploitation of the available technology'.
The strictures of Cairncross, Pollard, Kennedy and many others can no
longer be cavalierly dismissed as 'ill-founded' (McCloskey 1970, 459,
446).
The argument often put forward that in any case the banking system
adequately met domestic industrial demand is weak in that it assumes a
non-creative passivity on the part of the banks, as if they could only
ever simply respond to customers' explicit demands, and could not
themselves take the initiative in such a way that their supply of credit
could stimulate a latent into an actual demand, so giving a twist to a
virtuous spiral. The passive 'armchair' theory of banking, though
falsely applied internally, certainly did not fit the essentially
aggressively entrepreneurial way of life of the merchant bankers who
from their infancy went out from Germany and elsewhere to places like
Exeter, Liverpool, Manchester and London to create business, before
using the latter city as their base for opening up the world. Thus the
Barings, undeterred by their Argentinian fiasco, were already by the late
1890s taking the leading role in introducing Japanese business ventures
to the London capital market. Where there's a will there's a way: but
our leading bankers were complacently and profitably unaware of any
connection between the over centralization of savings and the structure
and operations of the banking system on the one hand, and the lack of
dynamism in British manufacturing industry on the other hand. That
the banks were not alone to blame goes without saying; but, whether
they recognized it or not - and they did not - they were inescapably
part of the problem. The infamous Macmillan Gap was being
conceived at the height of sterling's supremacy, though it did not
become delinquently of age until the 1930s.
The final triumph of the full gold standard, 1850—1914
After thousands of years of continual usage commodity money reached
its culminating excellence in the form of the gold standard as it
operated in and from the United Kingdom in the period from about
1850 to 1914. This formed a short golden interlude in monetary history
and an outstanding example of the contemporaneous 'sailing-ship
effect'. For just as the best sailing ships ever, such as the Thermopylae
(1868) and the Cutty Sark (1869), were built well after the steamships
which were to replace them had already become commonplace, so the
supreme development of commodity money based on the age-old
concept of intrinsic value took place long after bank bills, notes,
cheques and other forms of abstract 'fiat' money that were to supersede
356
THE ASCENDANCY OF STERLING, 1789-1914
gold had similarly become well established as essential elements of
everyday life. But whereas it was obvious to contemporaries that the
decline of the sailing ship, despite its final flourish, was inevitable,
contemporary opinion regarded the future of the gold standard as
permanently guaranteed by the very degree of near-perfection so
obviously achieved by such an ideal form of currency. The British gold
standard had, by the middle of the nineteenth century, become the
British Imperial Standard and, in the last quarter of the century, the
International Gold Standard, as most of the major trading nations of
the world hastened to imitate the currency system of what was still the
supreme financial centre of the world. As an American economist
admits, 'the period of the ascendancy of the gold standard throughout
the world corresponded with the apogee of the British Empire. Britain
was the most powerful nation on earth, and the money market centre of
the world was the London money market' (Cochran 1967, 25). The gold
standard seemed to have finally embodied the hard-learned monetary
experience of mankind throughout its long history and was
internationally acclaimed irrespective of the different forms of
government or the contrasting natures of the banking systems of the
countries which were belatedly rushing to imitate Britain's successful
example. Even after the devastating changes brought about by the First
World War, most influential opinion on both sides of the Atlantic
sought to put the clock back to Britain's finest financial hour, without
appreciating the essentially transient nature of the full gold standard
system.
As we have already seen, the 'pound sterling' for well over a 1,000
years signified silver, not gold. Gradually in the eighteenth century
because of two self-reinforcing causes, namely, first, the poor quality
and shortage of silver coins, and secondly the rise of money substitutes
in the form of metal tokens and bank paper, gold became increasingly
to be the preferred standard metal in practice. Unlike the situation in
many countries abroad, silver in Britain never regained its former
standing, so that by the nineteenth century she was spared the conflicts
between gold and silver supporters and the confusing chimera of
bimetallism that plagued countries in Europe and America for much of
the century. In 1816 gold became at last legally recognized as the
official standard of value for the pound, though it was not until the
restoration of convertibility in 1821 that the domestic gold standard
was in full operation. We have also traced how the Bank of England
came to be the monopolistic issuer of bank notes with a fixed fiduciary
issue of £14 million and also came to hold the main gold reserves of the
centralizing banking system. From the middle of the century the
THE ASCENDANCY OF STERLING, 1789-1914
357
previous concern about internal drains of gold from the Bank was
replaced by a more single-minded concern with external drains, while,
by means of trial and error, the Bank experimented with various devices
for safeguarding its gold reserves, the most effective of which turned out
eventually to be the combined use of bank rate with open market
operations in such a way as to make the market follow the Bank's
chosen rate (Sayers 1936). Even before the Bank of England had
mastered these techniques, the major trading countries had become so
favourably impressed that they too gave up their flirtations with silver
and bimetallism and adopted full gold standards with internal
circulation of full-bodied gold coinage and more or less freely allowed
imports and exports of gold, as the rules of the international gold
standard system demanded. Following the new German Empire's
decision in 1871 to base its mark on gold, Holland, Austro-Hungary,
Russia and the Scandinavian countries soon did likewise, while in 1878
France abandoned its bimetallic experiments in favour of gold. Thus by
the end of the 1870s, without being consciously planned, the
international gold standard system had fallen fittingly into place,
(though internally the USA still flirted with bimetallism).
Taking any two countries, A and B, say America and Britain,
operating a full gold standard, the relative gold values of their internal
coinage would give the 'mint par' of exchange. Thus with the US dollar
valued at 25.8 grains of gold nine-tenths fine, and the sovereign at 123.3
grains at eleven-twelfths fine, the mint par of exchange was £1 =
$4,866. The actual rates in the foreign exchange markets fluctuated very
closely to this parity, the outside limits, known as the 'specie points',
being determined by the costs of making payments in gold rather than
pounds or dollars, the three main costs in determining the width of the
specie points being the costs of freight, insurance and the loss of interest
for the time in transit. The enormous improvements in transport and
communication occurring at this time caused the specie points, and
therefore the range of fluctuations between currencies, to become even
narrower, making London, as the dominant market, more 'perfect' to
the economist as to the foreign exchange dealer.
The market not only worked micro-economically to smooth out
surges in the demand and supply of currencies but also helped, macro-
economically, in equilibrating the levels of economic activity among
members adhering to the international gold standard. The three chief
elements in this important equilibrating mechanism were, first, the
price effects; secondly, the income effects; and thirdly, the interest-rate
effects. In practice all three worked together though with differing
contributions in time and place. In theory the analysis of the various
358
THE ASCENDANCY OF STERLING, 1789-1914
elements has kept the midnight oil burning from Hume and Adam
Smith to the present day. (An excellent recent summary appears in
Eichengreen 1985.) Let us suppose that prices in country B rose
relatively to those in A, then following the fall in B's currency to its
export specie point, gold would flow from B to A, directly reducing the
money base in B and raising it in A, and therefore changing their
relative money supplies by a multiple of the money base, depending
upon the size and fixity of the bank multiplier, thus in time restoring
equilibrium and eliminating the need for further gold flows. These
ultimate price effects were associated with and speeded up by the effects
of relative changes in incomes and interest rates in the different
countries. Thus the country with the relatively high prices - B - would
lose exports and gain imports, depressing the incomes of workers and
the profits of employers in B, first in the export industries and then
more generally. The lower levels of income in B required a smaller
money base, easing the release of gold to A and so reinforcing the price
effects. The initial pressures in B that had caused prices to rise would
also cause rates of interest to rise, while the increased gold base in A
would lead to a fall in interest rates in A, so assisting in the restoration
of equilibrium.
All these were relatively short-term effects and depended on the lack
of rigidity - or to put it more positively, on the existence of a high
degree of responsiveness or 'elasticity' - in wages and other factor
prices in the economies of the countries concerned. It also assumed the
willingness of the authorities, whether long-term believers in laissez-
faire zealous new converts, not to impede these so-called 'automatic'
effects. The central banks did of course use their 'discretion' either to
thwart the rules or to assist them (bringing to a higher level of public
awareness the debate, mostly critical of discretion, first developed in the
Bullion Report of 1810). By early and judicious anticipatory action the
central banks could influence the movement of interest rates in the
direction which would eventually have resulted from the working of the
'automatic' forces, and so reduce the size of the fluctuations in gold
flows and in the size of 'barren' reserves, and so too moderate the
disturbing changes in incomes and employment. Certainly the Bank of
England became much more active in its use of bank rate, and although
other factors were involved, its role in safeguarding the gold reserves
was of increasing importance. Between 1845 and 1859 bank rate
changed on average just four times a year; between 1860 and 1874 it
averaged twelve times a year, with the record twenty-four times in 1873.
From 1875 to 1914 it averaged seven times a year, varying from none in
1895 to a dozen in 1893. It was during this time that bank rate gained a
THE ASCENDANCY OF STERLING, 1789-1914
359
veneration bordering on the worship of the gold standard it helped to
maintain.
Since all the world needed sterling for its trade it might at first seem
that the Bank of England would require to keep much vaster gold
reserves than the other central banks. Bagehot and Goschen among
others constantly warned of the need for bigger gold reserves in the City
to back up its worldwide responsibilities, though they differed as to the
proper distribution of such reserves between the clearing banks and the
Bank of England. As a matter of fact, although the Bank's reserves were
enlarged in the second as compared with the first half of the century,
yet they remained on average very much smaller than those of other
central banks, and 'never between 1850 and 1890 exceeded four per cent
of the liabilities of Britain's domestic bank deposits' (Viner 1937, 264).
From the 1880s to 1914 the Bank of England's reserves fluctuated
between an average of about £20 million and £40 million. In contrast
the Bank of France customarily averaged around £120 million of gold
reserves, the Imperial Bank of Russia held around £100 million and even
the Austro-Hungarian Bank held around £50 million. Such reserves
were largely 'barren' in that they yielded the banks concerned no return
in interest and, as reserves, were not at the same time available for
financing trade. Holders of sterling enjoyed the convenience and
liquidity of the world's favourite currency, and London was by far the
world's largest gold market. Because sterling was more liquid, more
heavily demanded and supplied and, together with gold, more perfectly
marketed than elsewhere, the Bank of England could and did manage to
operate with a much smaller, more active and less barren reserve than
was the case in other countries. 'It is small wonder that contemporaries
were torn between criticism of the Bank and admiration for the
efficiency of a system that enabled such vast transactions, both
domestic and external, to be handled with so small a reserve'
(Feavearyear 1963, 314).
Luckily, the world's stock of monetary gold increased substantially
during this period, from £519 million in 1867 to £774 million in 1893,
an annual rate of increase of 1.5 per cent; and to £1909 million by 1918,
at an average annual rate of 3.7 per cent; helping to give confidence to a
financial world that still worshipped gold, while in fact relying on bank
deposits at least twenty times as large. Minimum reserves were thus a
glowing testimony to the skills of the City and of the Bank. Yet there
was a price to pay. As Viner has shown,
the practice of extreme economy in the maintenance of bank reserves did
have as an accidental by-product the beneficial effect that it guaranteed to
the metallic standard world that so far as England was concerned there
360
THE ASCENDANCY OF STERLING, 1789-1914
would be no hoarding of gold and that all gold reaching that country would
quickly exercise an influence in the appropriate direction for international
equilibrium . . . But it tended to intensify the growing tendency for
instability of business conditions within England itself. (1937, 269)s
London was becoming, during the second half of the nineteenth
century, the headquarters not only of most of the large banks in
England and Wales but also of a growing number of overseas banks, the
main business of which lay in the former colonies and dominions,
including groups of banks variously known as the Imperial Banks and
the Eastern Exchange Banks. One of the earliest of these was the
Chartered Bank of India, Australia and China, registered in 1854 after
some years of struggle against the East India Company which was still
jealously trying to guard its monopoly. James Wilson, originally from
Hawick, and as we have seen, leader of the 'Banking School' and
founder of The Economist, was chiefly responsible for its foundation
and for its early progress. (The story of its first hundred years is
skilfully portrayed by Sir Compton Mackenzie in Realms of Stiver,
1954.) The Standard Bank of South Africa, originally formed by John
Paterson and five other British businessmen in Port Elizabeth in 1857,
became one of the first banks to be registered in London under the 1862
Limited Liability Act. Grindlay's, the British Bank of the Middle East,
the Chartered Mercantile Bank of India, London and China, the
Oriental Bank Corporation, the Hong Kong and Shanghai Bank, the
Bank of London and South America, and Barclays, Colonial, Dominion
and Overseas were all banks with similar ambitions, spreading out
from London to assist the development of trade in 'colonial' goods in
the second half of the nineteenth and first half of the twentieth century.
A late nineteenth-century example of such a bank, engaged in trade
with Nigeria (including its initial provision of a modern currency), was
the British Bank of West Africa (BBWA). It was founded jointly by
Alfred Lewis Jones of Carmarthen and George Neville of London, first
as an offshoot of the business of the Elder-Dempster shipping line, and
began carrying on a banking business from their Lagos office in the
early 1890s. Having demonstrated their abilities, they were duly
registered in London as a limited company in 1894.
The interlocking directorates of the boards of these banks with those
of the London merchant and clearing banks and with the Bank of
England, a pattern which existed right from the early formation of the
overseas banks and which persisted well into the twentieth century,
further reinforced the external bias of the City of London. Thus Lord
5 See pp. 368 and 380-4 below.
THE ASCENDANCY OF STERLING, 1789-1914
361
Milner, who had been Governor of South Africa from 1899 to 1902, and
director of the London Joint Stock Bank (later the Midland), was
chairman of BBWA from 1910 to 1916. The 1st Viscount Goschen,
member of the merchant banking family Goschens and Cunliffe,
became a director of the Bank of England at twenty-seven, wrote the
classic 'Theory of the Foreign Exchanges' (1861) and went on to
become Chancellor of the Exchequer in 1886. A close relative, Sir
Henry Goschen, was a director of the Chartered Bank and Chairman of
National Provincial Bank. Lord Harlech was not only a director of
BBWA and of Midland Bank but carried on for a number of years as
chairman of both, and at a time when the Midland was the world's
largest bank. Lord Inchcape was concurrently a director of BBWA and
of National Provincial, while Sir Cyril Hawker, after forty-two years
with the Bank of England became chairman of Standard Bank (which
took over BBWA) and later of the combined Standard-Chartered
Group. Such examples could be multiplied almost indefinitely. Suffice it
to say that at the very time that the formerly diffused country banking
system was being transformed into a centralized system based largely in
London, the City was increasing its export not only of capital but also
of its banking expertise throughout the whole range, from junior clerks
to managers and directors, quite a few of the latter having had the
highest experience of colonial government. The effect of this influential
concentration of administrative and financial experience was greatly to
strengthen the external bias of the City of London.
The supply of trained persons to take up the key positions in overseas
banks came from a surplus of young bankers from all over Britain,
particularly from Scotland. The Scottish Institute of Bankers, the
world's first, was set up in 1875, four years before that of England and
Wales. The British banks were soon training, or at least employing, far
more young people than could readily find promotion at home, hence
the drain of young bankers to complement and fructify the export of
capital. Professors Lythe and Butt give it as their view that 'Scotland
almost certainly invested more abroad and not enough at home . . .
foreign competition was assisted and at the same time new industrial
development at home was sacrificed' (1975, 238-9). The growing
centripetal powers of the City might leave Britain's industrial hinterland
rather neglected, but those same powers greatly strengthened the
financial links with all the major trading centres overseas, in many of
which British or British-type banks employing a core of British staff
were becoming increasingly active by the turn of the century. It was this
close, personal integration of the overseas banking institutions based on
common experience, training and methods of operation that underlay
362
THE ASCENDANCY OF STERLING, 1789-1914
the efficient working of the commodity markets, the bill on London and
the money and foreign exchange markets; while in similar fashion the
closely connected merchant banking communities facilitated the
smooth working of the London capital and gold markets. The freedom
and flexibility of those markets enabled the Bank of England to carry
out its duties of running the gold standard system within a range of real
economic costs that seemed politically tolerable and appeared to yield a
clear balance of advantage, at least up to 1914. (It was this same
personal network overseas which helped to guarantee the more limited,
less spectacular but still very significant success of the sterling area
system after 1931 by which time the gold standard was justifiably
vilified as a barbarous relic.)
The international crisis of 1907, which had its most dramatic effects
in the USA, where it brought about widespread bank failures, served to
confirm public belief on both sides of the Atlantic in the superiority of
the British financial system, and the efficiency of its central banking
operations in particular. Bank rate was raised to 7 per cent on 7
November 1907, the highest since 1873, and attractive enough to draw
into the Bank £7 million of gold from Germany, £31/i million from
France, £2Yz million from India and £6 million from gold-mining
countries, enabling the Bank very quickly to rebuild its reserve to more
than the figure of £21 million which existed before the crisis began. By
May 1908 bank rate had been brought down to 2'A per cent. Thus bank
rate again proved itself A technique associated with a most satisfactory
maintenance and improvement in industrial equilibrium' (Clapham
1970, II, 389). This result helped the American official investigators of
the crisis to recommend a similar central banking system, suitably
adapted to their continental conditions, for the USA. Yet these victories
were already being won at a heavy price, for despite the quick
restoration of the reserves and of financial equilibrium, cheap money
failed to bring down unemployment, which averaged 8 per cent over the
two years 1908 and 1909, with the rate in shipbuilding rising to 13 per
cent in 1909 and with most of the building trades suffering 11 per cent
unemployed. Nevertheless, because of its glittering advantages in other
directions, the harsh discipline demanded by the rules of the gold
standard game remained politically acceptable until after 1914. As
C. R. Fay has explained: 'When the world lived on Lancashire cotton,
Cardiff coal, and the London money market, the policy of free trade
[and he might well have added, its financial counterpart, the gold
standard] was justified by the facts. But this situation passed away with
the War' (1948, 323). Hobsbawm fully agrees: 'The stability of the
British currency rested on the international hegemony of the British
THE ASCENDANCY OF STERLING, 1789-1914
363
economy, and when it ceased, no amount of bank rate manipulation did
much good' (1968, 200).
Two further (generally overlooked) costs are associated with the
acceptance by the Bank of England of responsibility for safeguarding
the country's gold reserves, for this involved giving up its profitable
competition with the clearing banks and downgrading the operations
of the Bank of England's branches. The first meant the reduction of a
most powerful competitor, and hence a strengthening of the growing
monopoly powers of the big, amalgamating banks, while the
downgrading of the Bank's branches meant a reduction of its daily
involvement in, and consequent close awareness of, business conditions
in the industrial regions around places like Leeds, Birmingham,
Liverpool, Manchester, Newcastle and so on. 'There were sustained
differences of opinion,' states Sir John Clapham, 'about the policy of
the branches' (1970, II, 402). Ernest Edye, Inspector and Head of
Branches from 1897 to 1914, argued with annoying and vigorous
persistence in favour of expanding branch lending in direct competition
with other banks. But the lesson, already well learned by the Bank of
England by 1890 (and subsequently painfully relearned by a number of
other central banks), was that you must not compete with the
commercial banks if you wish to control or even influence their policies
or hold part of their reserves. Although Ernest Edye kept up his
campaign against the Bank's 'soft-pedalling' of branch banking, the
requirements of the gold standard at that time inevitably meant a
reduction in the importance of the branches. Here again the centripetal
force of London reduced the Bank's direct involvement in assisting
businesses in the regions in competition with the clearers, whose
monopoly powers were to that extent thereby increased. Again the City
wins, the regions lose: perhaps not a lot in each instance, and therefore
easy to overlook at the time; but the cumulative results of these many
different elements of centripetal bias were significant and long-lasting,
forming a delayed-action economic bomb destined to wreak
considerable damage on the industrial regions in the inter-war period.
Cheap coal, cheap iron and steel, and cheap capital from Europe in
general and from Britain in particular, helped in creating the
infrastructure, such as the ports, waterworks and railways, in the
undeveloped world. To what extent this should be praised as
'development' or castigated as 'exploitation' remains largely a
subjectively political rather than an objectively economic question.
Similarly an assessment of the balance of benefits over costs which
accrued to Britain from operating the gold standard system - in which
many other countries were free riders - depends on a mixture of
364
THE ASCENDANCY OF STERLING, 1789-1914
economic and political considerations. Certainly sterling and the City
of London gained enormously, while the losses in the form of
unemployment and belated industrial reconstruction occurred mainly
after 1914, when these evils could be blamed on the war and when in
any case the gold standard had ceased to operate, ar at least to operate
fully. The import of expensive munitions and cheap food during the
war, largely paid for by Victorian investment, and cheap food for the
unemployed in the inter-war period, were of immense political
importance. But by then the period of the ascendancy of sterling had
passed, and the gold standard, which internally had enjoyed a long run
but internationally had been short-lived, was permanently dead, as the
failure of the stubbornly misguided attempts to revive it, described in
the next chapter, abundantly prove.
At the beginning of the nineteenth century Henry Thornton, in his
Enquiry into the Nature and Effects of the Paper Credit of Great
Britain (1802), laid down what Schumpeter has called the 'Magna Carta
of Central Banking', namely:
to limit the total amount of paper issued, and to resort, whenever the
temptation to borrow is strong, to some effectual principle of restriction; in
no case, however, materially to diminish the sum in circulation, but to let it
vibrate only within certain limits; to afford a slow and cautious extension
as the general trade of the kingdom enlarges itself; to allow of some special,
though temporary increase in the event of any extraordinary alarm or
difficulty; and to lean to the side of diminution in the case of gold going
abroad, and of the general exchanges continuing long unfavourable; this
seems to be the true policy of the Bank of England. To suffer either the
solicitations of merchants or the wishes of government to determine the
measure of bank issues is unquestionably to adopt a very false principle of
conduct. (Quoted in Humphrey 1989, 9-10)
The 'vibrations', or the swings of the monetary pendulum, from
broad quantity to narrow quality and back again were repeated many
times in the course of the long nineteenth century as the bullionists, the
Currency School and similar restrictionists attempted to keep the
money supply within narrow limits and emphasized the golden core,
while the anti-bullionists, the Banking School and other expansionists
tried repeatedly to widen the type and quantity of what could
legitimately be accepted as money, and emphasized the importance of
the peripheral, paper money substitutes. By and large the Bank of
England, aided by the legal restrictions on the note issue, kept the
dynamic balance remarkably well, through timely intervention using
bank rate, open market operations and other devices, although on
occasions getting the timing wrong, unsurprisingly. Even in the latter
THE ASCENDANCY OF STERLING, 1789-1914
365
circumstances, the Bank could flexibly retrieve the situation, for its
discretion was inspired by a traditional pragmatism rather than by any
rigid dogma. Thornton's 'Magna Carta' turned out therefore to be a
true guide and prophecy; but even he could not have foreseen the extent
to which the full gold standard would achieve not only a high degree of
stability within Britain, but would also allow sterling to become during
the nineteenth century the most extensively used currency up to that
time in world history. But in 1914, in contrast to the Pax Britannica and
the stability of the sterling-centred full gold standard, a more violent
century was about to explode into existence, with many more
competing central banks giving in too readily to the short-term
demands of their governments, entailing far wider swings of the
monetary pendulum.
Gold reserves, tallies and the constitution
The Great Reform Act of 1832 was passed despite the initial strong
opposition of Wellington and most of the financial and business
leaders. According to the eminent constitutional historian, G. Adams,
'public excitement reached the highest point that had ever attended any
question before parliament' (1935, 437). Francis Place, with other
supporters of reform, seized on the vulnerability of a financial system
based like an inverted pyramid on a dangerously small reserve of gold.
They therefore urged the public, with ultimate success, to 'Go for Gold
and Stop the Duke'.6 Fortuitously the actual buildings of the old
Houses of Parliament were destroyed just two years later, the indirect
result of that long redundant credit instrument, the Treasury Tally. An
Act of 1783 had decided on their abolition but this was not to take place
until the death of the last of the Exchequer Chamberlains - which did
not occur until 1826. By then the tallies were the object of public
ridicule. Charles Dickens attacked the Treasury's 'obstinate adherence
to an obsolete custom' as if these notched sticks were 'pillars of the
constitution'. In a way that no one could have imagined their
connection with the constitution, even in their final days, turned out to
be surprisingly close. By 1826 parts of the House of Commons had
become jam-packed with these wooden relics. In 1834 to save space and
fuel it was decided that they should be thrown into the heating stoves of
the Commons. 'So excessive was the zeal of the stokers that the historic
Parliament buildings were set on fire and razed to the ground. The
tallies perished in a blaze of defiant glory' (Robert, R., 1956, 76). Public
concern about the paucity of gold reserves repeatedly emerged. In 1909
6 See also p. 310 above.
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THE ASCENDANCY OF STERLING, 1789-1914
the London Chamber of Commerce issued a report calling for stronger
reserves and a reduction in the Fiduciary Issue. (As a matter of fact the
specie content of narrow money, 'notes and coin' had substantially
increased from 48.3 per cent in 1845 to 76.7 per cent in 1913). 7 Finally it
is important to realize that these criticisms were not aimed at the
concept of the gold standard but on the contrary were attempts to
improve what was almost universally held to be a practically ideal
system - up to the eve of its disappearance.
7 G. P. Dyer, 'Gold and the Goschen pound note', British Numismatic Journal (1995).
British Monetary Development in the
Twentieth Century
Introduction: a century of extremes
Every success and every failure experienced in all previous monetary
history have been repeated, with additions and on a vaster scale, in the
twentieth century. In money as in economic, social and political life in
general, this has been a century of extremes. Only in the case of money,
however, have the violent oscillations repeated themselves quite so
faithfully in their familiar reversible pattern in the advanced countries
of the world. Primitive commodity moneys were still in use over large
tracts of the 'undeveloped' world as recently as the 1960s, as described
in chapter 2; while throughout the developed world the most successful
and traditional of all commodity moneys - gold - reached its highest
peak of operational perfection at the beginning of the twentieth century.
It remained a dazzling ideal to which governments sought to return
until the outbreak of the Second World War and was again being flirted
with as a potential international price stabilizer, in theory if not in
actual practice, in the last decades of the century. Despite such
outstanding examples of the appeal of stable money, inflation of
unprecedented proportions repeatedly interrupted attempts to adopt
sensible monetary policies.
Monetary management, with mismanagement the beguiling obverse
of the same coin, became a tool universally available to all governments
as the century unfolded; a management no longer physically
constrained by the supply of gold. In these circumstances it might at
first be assumed that at least one of the recurrent failures of earlier
history, namely an actual shortage of money, would not be repeated.
Not so: in the 1930s a dire monetary scarcity, brought about directly by
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BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
governmental mismanagement, intensified and was a strong con-
tributory cause of the world's most severe economic depression.
Nevertheless the bias in twentieth-century financial policy has
undoubtedly been in the opposite direction, that is towards excessive
money creation, so much so that some form of gold or general
commodity anchor was again being internationally investigated as the
twentieth century drew to a close.
Against this violent background the swings of the monetary
pendulum between quality and quantity and the changing monetary
theories behind actual policies have also been alternating to an extreme
degree. Apart from a precious few examples of long-term stability,
notably in small, traditionally neutral countries like Switzerland and
Sweden, extreme fluctuations have held global sway. Even Britain, with
its long tradition of political moderation, has experienced swings to an
unprecedented degree, from price stability to deflation with mass
unemployment and to inflation, first with over-full employment and
then mass unemployment again; and with the associated theories which
acted as the explanation or excuse for policy lurching suddenly from
stolid classicism through confident Keynesianism and defiant
Friedmanism back to an uncertain but more realistic pragmatism.
Given Britain's influence on both monetary practice and theory,
stemming in turn from its vital role in the operation of the international
gold standard, the export of its commercial and central banking
expertise, the prestige and following of Keynes, the bold embodiment of
Friedmanism in the Thatcher experiment, the City's irresistible
attraction for foreign banks and the stubborn eminence of London's
foreign exchange market, the financial development of Britain in the
twentieth century, notwithstanding the decline of its empire and the
erosion of its lion's share of world trade, still remains of central
importance in world monetary history
Financing the First World War, 1914-1918
Despite relatively minor conflicts such as the Crimean War (1854-6)
and the Boer War (1899-1902), the national debt had been modestly
reduced in nominal terms, and very significantly reduced as a
percentage of national income, in the century after 1815, falling from
£830 million in 1815 to £650 million in 1913. Such reductions had been
brought about by the generous use of frequent budget surpluses, the
result of good housekeeping by Victorian Chancellors, some of whom
also took advantage of recurring spells of cheap money-market rates to
convert large chunks of the debt into lower rates. Thus Goschen in 1888
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
369
converted the 3 per cent stock to 23A per cent, a rate which was to fall to
I'Aper cent in 1903. Edwardian Chancellors were bolder and bigger
spenders, though Asquith in his three budgets between 1906 and 1908
managed to redeem much of the debt incurred during the South African
war. Lloyd George's budgets of 1909-11, 'which may not unfairly be
described as the most revolutionary series of proposals ever laid before
a British Parliament' (Muir 1947, II, 757) introduced far greater
progression into the fiscal system, tapping far more copiously the
wealth of the rich. Although the purpose of Lloyd George's fiscal policy
was for financing social welfare benefits, the fiscal framework had
thereby been fundamentally transformed on the eve of the First World
War into a much more buoyant source of revenue, ripe for the insatiable
demands of the military machine. What had been introduced, at the
cost of a seething constitutional crisis, for welfare thus became a timely
godsend for warfare.
The tax base which had fortuitously been put in place to support the
First World War was much more progressive, buoyant and effective than
that which had been available to finance the French wars of 1793-1815.
Nevertheless borrowing had to be resorted to still more drastically, so
that the national debt rose tenfold during the four years of the First
World War, compared with just a trebling during the twenty years of
war from 1793 to 1815. It was not until March 1920, some sixteen
months after the war ended, that the national debt rose to its peak of
£7,830 million. Some £1,230 million or 15.7 per cent was owed to
people abroad. Only a very small amount, £315 million or just 4.0 per
cent was permanently funded or very long term, while around £5,000
million or 63.9 per cent had varying maturity dates, mostly of medium
term, a feature which was to cause considerable re-funding problems in
the inter-war period. As much as 16 per cent or £1,250 million consisted
of the highly liquid 'floating debt', mostly made up of three-month
Treasury Bills. In short, the borrowing and taxable capacity of the
country had been put under immense strain, yet both at the time and
subsequently considerable controversy has raged concerning whether
the correct balance had been struck between borrowing and taxing, and
as to whether the best available methods for fund-raising had been put
into practice.
Keynes, writing twelve years after the end of the war, was too
pessimistic in fearing that 'perhaps the financial history of the war will
never be written in any adequate way' because 'too many of the
essential statistics' were unavailable; but, given his close involvement as
Treasury adviser and his analytical genius, he was quite right when,
modestly including himself in the condemnation, he admitted that
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BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
'looking back he was struck by the inadequacy of the theoretical views
we held at the time as to what was going on and the crudity of our
applications of the Quantity Theory of Money' (1930, II, 170-1).
Theoretical refinement was a luxury that had to await the peace.
Keynes's pessimism - a characteristic not unknown among the
profession - was not confined to worrying about statistical deficiencies.
In September 1915 he circulated what Lloyd George has called an
'alarmist and jargonish paper' to the Cabinet in which he gave his
considered opinion that 'it is certain that our present scale of
expenditure is only possible as a violent spurt to be followed by a strong
reaction: the limitations of our resources are in sight'. He went on to
warn of British bankruptcy by the spring of 1916 (Lloyd George 1938, 1,
409). Fortunately although McKenna, the new Chancellor, was
frightened stiff by the gloomy forecast of his chief adviser, Lloyd
George, in his typically modest way, 'knew more about the credit
resources of this country' than either the current Chancellor or his
'pessimistic, mercurial and acrobatic economist'. Keynes was 'much too
impulsive a counsellor for a great emergency': he was 'an entertaining
economist whose bright but shallow dissertations on finance and
political economy, when not taken seriously, always provide a source of
innocent merriment to his readers' (Lloyd George 1938, I, 410). Keynes
himself returned similarly effusive compliments about Lloyd George: 'a
Welsh witch . . . rooted in nothing, void and without content; a prism
which collects light and distorts it; this syren, this goat-footed bard, this
half-human visitor to our age from the hag-ridden magic and enchanted
woods of Celtic antiquity' (1933b, 35-6).
Keynes was not alone in considering the rate of expenditure reached
in the early part of the war to be unsustainable. As early as the autumn
of 1914 The Economist assured its readers of 'the economic and
financial impossibility of carrying on hostilities on the present scale'
(Mackenzie 1954, 240). Before turning to see how such an 'impossible'
rate of expenditure was substantially exceeded and how the rising
balance between taxation and borrowing was managed, we must first
consider briefly how the immediate crisis facing the country's financial
institutions in August 1914 was successfully overcome.
The first financial reaction to the assassinations of Archduke
Ferdinand and his wife in Sarajevo on 28 June 1914 was a series of
banking panics in Europe, intensified as the Balkan conflict widened.
So far as Britain was concerned, the initial effect was to increase the
flow of hot money into the traditional safe haven of London. However,
by the end of July the growing probability that Britain would become
directly involved frightened the City so much that the vastly increased
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
371
desire for firms and persons to make their assets more liquid than
normal, particularly by selling vast quantities of securities, brought
about the closure of the Stock Exchange, temporarily, on 31 July. Bank
rate was raised from 3 to 4 per cent on 30 July, to 8 per cent on 31 July,
and to the panic rate of 10 per cent on 1 August, when, accompanying
the announcement, the Chancellor's letter to the Governor of the Bank
of England permitted an excess issue of fiduciary notes if this were to
prove necessary. Fortunately for the deliberations of the monetary
authorities, Monday 3 August was a normally scheduled Bank Holiday.
To gain time to decide on their plans three additional days, up to and
including Thursday, were also declared to be Bank Holidays. To stem
any pre-emptive drain of gold the Chancellor announced that specie
payments were not to be suspended. A series of steps were taken to
avoid the possible domino effect of bankruptcies. On 3 August
Parliament passed a 'moratorium' in the form of a Postponement of
Payments Act followed by a Royal Proclamation deferring the maturity
of bills of exchange for a month with government guarantees following
later to enable the Bank of England to advance virtually all the funds
required by the discount houses and the banks to deal smoothly with
the increased volume of bills. A Currency and Bank Notes Act, rushed
through both Houses of Parliament on 6 August, empowered the
Treasury to issue notes of £1 and 105. denominations, and granted
temporary legal tender status not only to Scottish and Irish banknotes
but also to Postal Orders, which latter became negotiable instruments
despite still having the words 'not negotiable' plainly printed across
them. A Courts (Emergency Powers) Act was passed on 31 August to
relieve debtors in general who were not able to pay because of war
circumstances, thus complementing the earlier special Acts of
moratorium; and a Government (War Obligations) Act was passed on
27 November to indemnify government ministers for the emergency
measures they felt forced to take.
This urgently arranged and costly battery of protective devices saved
the City from any further signs of panic, and business quickly returned
to normal, except of course for trading with the enemy, aspects of which
could be cunningly concealed through third parties. It was the need for
someone with long experience of discerning the true origins of trade
bills, and so able to prevent London's first-rate services being used to
finance enemy trade, that brought Montagu Norman in April 1915
from Brown Shipley full-time into the Bank of England (where he had
been a director from 1902) as adviser to the Deputy Governor. Because
of the four-day Bank Holiday the panic 10 per cent bank rate was in
operation for only a single working day and was quickly brought down
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BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
to 6 per cent on 7 August and to 5 per cent the next day. As to the
foreign exchanges, sterling, by far the world's most coveted currency,
actually rose for a time well above its mint par of $4.86 to as high as
$6.50 before settling down fairly close to par, with the Bank of England
avoiding the dangers of shipping gold overseas by using its gold deposits
in Ottawa to pay North American creditors. The public in England and
Wales took to the new small notes of the Treasury - called 'Bradbury's'
after the signature of the Permanent Secretary - like ducklings to water,
despite the very poor quality of the first issues. They met a long-felt
need, and their ready acceptance allowed the banks, and through them
the Bank of England, gradually to gather in the gold circulation to add
to its war chest. This quiet, unofficial cessation in specie payments
which accompanied and was made possible by the public's welcome of
the new notes, did not bring forth the dire consequences that had been
feared by many, including notably 'Mr J. M. Keynes' (who) 'at this time
firmly predicted national ruin if specie payment was suspended' (Owen
1954, 265). The cessation of internal gold circulation, then conceived
simply as an urgent temporary expedient, thereafter became
permanent. Thus ended without fuss or fanfare nearly 700 years of
intermittent gold coinage circulation, including a century of the full
gold standard, ousted ignominiously by bits of scrappy paper. It took
the stock exchange rather longer than the other financial institutions to
resume normal working, which it eventually succeeded in doing from 4
January 1915.
Although the motto 'Business as usual' was a tribute to the resilient
spirit of the country, the mood of normality was carried to excess and
so worked against public acceptance of the true scale of effort, in
finance as in other areas, demanded by the enormous challenges of this
new type of war. It lulled the public and most of the government into
complacently delaying the acceptance of physical controls like
requisitioning and rationing, so placing too much of the burden of
transferring resources from civilian to military uses on voluntary
market forces and normal financial mechanisms. It helped to push the
balance of government funding too heavily towards borrowing, and
especially short-term borrowing, ably assisted by eager and efficient
financial institutions, rather than relying more heavily on taxation. The
government's revenue from taxation increased from around £200
million in 1913-14 to nearly £900 million in 1918-19, i.e. by about four
and a half times. But expenditure soared during the same period by
nearly thirteen times, from just under £200 million to around £2,580
million. On average only about a third of government expenditure
during the war was raised by taxation, leaving two-thirds of an ever-
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
373
rising total to be cajoled voluntarily by borrowing, generally at an
unnecessarily increasing cost.
The first emergency provision of cash was a vote of credit granted by
Parliament on 8 August 1914, followed on 26 August by an enabling
'War Loan Bill' giving the government the power to raise 'any sum
required' for war purposes, a blank cheque of which Lloyd George and
subsequent Chancellors took full advantage. A further vote of credit of
£225 million was granted on 17 November, when Lloyd George
introduced the first war budget. Income tax and supertax rates were
doubled, the duties on tea were raised by 60 per cent, and on beer by a
massive 300 per cent, while the first War Loan, redeemable 1925-8, was
issued for a nominal £350 million at 3Vz per cent, but by being issued at
95 brought in £332.5 million at a true rate of approximately3% per cent.
In his second war budget in May 1915, Lloyd George being too pleased
with the influx of revenue, left tax rates unchanged, thus missing the
chance of raising revenue closer to the spiralling expenditures, and
thereby set quite a problem for his successor as Chancellor, Reginald
McKenna. McKenna raised the rates on indirect taxes and both the
rates and progression of income and supertax. Notably he introduced
an Excess Profits Duty at 50 per cent (later raised to 80 per cent) and
placed import duties of 33 per cent on cars, motor-cycles, clocks,
watches and film. The Excess Profits Duty was not only welcomed as
catching unscrupulous profiteers but turned out to be a most lucrative
tax, yielding around a quarter of total revenue during the latter half of
the war. By so tapping the inequitable 'profit inflation' of wartime 'the
British Treasury, by trial and error, had got as near to the ideally right
procedure [of taxation] as could be expected' (Keynes 1930, II, 174).
McKenna's import duties, imposed as a temporary infringement of free
trade in order to raise desperately needed revenue, were later to be
strengthened to protect domestic industry. However praiseworthy his
tax policy might be judged, his borrowing policy was less inspired. The
second War Loan, which he issued in July 1915 at 95, carried a nominal
rate of 4V2 per cent, a full 1 per cent higher than that of Lloyd George,
and set a bad precedent. The third War Loan, February 1917, and the
post-war Victory Loan of June 1919 both issued at 95, carried a 5 per
cent coupon (a 4 per cent tax-free option was largely ignored).
Furthermore all three latter loans carried what might be called 'reverse
conversion' privileges whereby owners of previous, cheaper stock could
convert into the new longer-dated but higher-rated stock, in effect
raising rates retrospectively, and so intensifying the service and transfer
burden in the post-war deflation.
What had started under Lloyd George as a moderately cheap war at
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BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
around 3% per cent turned into a dear war financed at rather more than
5 per cent. Not only was the total quantity of borrowing excessive, a
weakness understandable given the cumbersome unpopularity of taxes,
but so was the price, for which there was no acceptable excuse. The
loans were oversubscribed and reached in very short time their target
sums. Thus the third War Loan issued by Bonar Law in February 1917
(when the Governor of the Bank of England insisted on keeping to the
high 5 per cent rate) received applications for £1,000,000,000 from some
5,289,000 subscribers within six weeks. The first billion-pound loan in
world history was thus raised with surprising ease and speed,
prompting the government to follow this up by a system of continuous
borrowing 'on tap' by the issue of National War Bonds, four series of
which were issued between October 1917 and May 1919. Instead of the
government using its monopsonistic power as the only purchaser of
really large loans in wartime to get such loans at a cheap rate, it
perversely paid higher rates than was necessary, a feature which
increased the service burden both during and after the war, when it also
imposed the hidden cost of higher unemployment and lower private
sector investment than would otherwise have been the case. Lloyd
George's criticism is fully justified: 'The adoption of the principle that
the British Government had to pay the commercial rate . . . had a costly
sequel. McKenna's action had no doubt the fullest authorisation from
the leading circles of banking and finance, but these circles are by no
means to be reckoned as infallible advisers' (1938, 1, 74).
These strictures applied even more strongly to short-term borrowing
where the Bank of England's desire to keep the pound strong on the
foreign exchanges was an added factor helping to raise market rates of
interest, e.g. the rate on the issue of Exchequer Bonds, 1916 was at 6 per
cent, bank rate in July 1916 was also raised to 6 per cent where it
remained until the following January; and 5 per cent was paid on the
'special deposits' which the banks kept with the Bank of England. A
conflict inevitably arose between the government's need, however
weakly expressed, for cheap finance and the Bank of England's worship
of the market and its belief that it was still operating the gold standard,
a conflict made all the more bitter by the overbearing attitude of the
Governor, Sir Walter Cunliffe, by common consent an autocratic bully
and 'one of the nastiest men ever to be Governor' Banking World,
August 1989, 55). Cunliffe not only pressed the imperative need for high
rates on the Chancellor, Bonar Law, but interfered with mailed
instructions from the Chancellor to the Treasury in Ottawa regarding
sales of gold. The Cunliffe quarrel was 'the worst blot ever known on
the relations between Governors and Chancellors' (Sayers 1976, I, 99).
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
375
Only an immediate threat by Lloyd George to nationalize the Bank
caused Cunliffe to cave in; he promised to 'consult the Chancellor on
general conditions affecting credit' but 'did not propose then or at any
time to obtain the Chancellor's special sanction in regard to such
changes as might be contemplated in Bank Rate' (Clay 1957, 104). The
question of monetary sovereignty as between Treasury and Bank was
thus postponed for thirty years, until the Bank was nationalized in
1946. It could at least be said in Cunliffe's favour that with the
assistance of the Bank's agent in New York, J. P. Morgan & Co., the
pound was kept within 2 per cent of its mint parity for most of the war,
so enabling Britain to get full value for the loans it raised abroad
totalling £1,365 million, chiefly from the USA, which partly helped to
compensate for the larger total of £1,741 million that Britain lent to its
allies. On balance Britain paid for much more than its own war effort;
yet despite the war's debilitating burden there was a universal euphoric
desire to return as soon as possible to the gold standard that was
believed to have been the symbol, and if not the cause, at least an
indispensable condition of Britain's recently held position of financial
and trading supremacy.
The abortive struggle for a new gold standard, 1918-1931
In strictly legal terms the gold standard was still in operation during the
war, though mines and U-boats by making insurance costs prohibitively
expensive effectively prevented the free import and export of gold.
Consequently it was not until after the war had ended that the law
caught up with the fact that Britain had gone off gold in August 1914.
Under the Regulations for the Defence of the Realm, 1 April 1919, the
export of gold was legally prohibited, but these regulations were
modified by the Gold and Silver (Export Control) Act of 1920 in such a
way as to facilitate the re-establishment of London as the chief market
for gold. This would be the means whereby, supported by an
attractively high bank rate, a sufficient gold reserve could be drawn into
the Bank of England so as to go back to the gold standard in all its
essential forms. Unequivocal guidance towards this promised land was
provided by the Cunliffe Reports. When Lord Cunliffe retired after his
five-year stint as Governor (1913-18) he was appointed to chair a
'Committee on Currency and Foreign Exchanges after the War', which
promptly issued its Interim Report (Cd 9182) in August 1918, followed
by the Final Report (Cmd 464) in December 1919. Cunliffe was a man
of few words, so, unlike most inquiries into money, the reports are brief,
brisk and to the point, and came to clear, confident conclusions
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BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
calculated to please the City - and to crucify the economy on an
outdated cross of gold.
The interim report, some half-dozen pages priced 6d. (or 2.5p),
considered that the 1844 Act 'has on the whole been fully justified by
experience' and therefore 'an effective gold standard should be restored
without delay'. Even in its single and apparently bold innovation, in
believing that 'the internal circulation of gold was neither necessary nor
desirable' it was conservatively harking back to a suggestion first made
by Ricardo in 1811. In proposing that convertibility should be restored
in terms of ingots of bullion, Ricardo had argued that a gold standard
could be re-established with an economy of gold usage, a minimum
drain on the world's supply of gold, and full reliance on cheap paper for
internal circulation (Viner 1937, 177). Cunliffe saw as an essential
precondition to convertibility the reduction of government borrowing,
especially of the floating debt, even if this meant a politically
unpalatable 'caution with far-reaching programmes of housing and
other development schemes' - a swipe at Lloyd George's vote-catching
policy of 'homes fit for heroes'. The 1844 principle of a fixed fiduciary
note issue should be restored with the Treasury note issues to be
amalgamated with, and under the control of, those of the Bank of
England. As we have seen, Cunliffe when Governor (for a period longer
than any of his 107 predecessors) had struggled unscrupulously to
maintain as high a degree of independence for the Bank from
government as was possible, and this cessation of government note issue
was seen as being much more than simply a symbol. So the final report
asserted, 'We have found nothing in the experiences of the war to falsify
the lessons of previous experience that the adoption of a currency not
convertible into gold is likely in practice to lead to overissue.' It
considered it to be essential to reduce the outstanding issue of Treasury
notes by suggesting that the actual maximum issue each year should be
reduced until there was no strain on the Bank's gold reserve of around
£150 million, the level which Cunliffe had obtained by hook or by
crook during the war. The supremacy of bank rate was reaffirmed in
the report's statement that 'the recognized machinery which operated
to check a foreign drain and the speculative expansion of credit in this
country must be kept in working order and should not be evaded by any
attempt to continue differential rates for home and foreign currency'.
It took far longer than expected to set up the new 'Gold Bullion
Standard' and even longer to merge the Treasury notes with those of the
Bank. Once the wartime restrictions were relaxed, the pound quickly
fell from the rate of $4.76 to which it had been pegged - and which
looked delusively close to the pre-war rate to which it was then almost
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
377
universally assumed Britain should return - down to the record low (up
till then) of $3.21 in February 1920. Prices had risen much faster in the
post-war boom of 1919-20 than in the four years of war, and to stem
the speculation and lift the external value of the pound, bank rate was
raised to 7 per cent in April 1920, the highest level (except for the one-
day increase to 10 per cent in August 1914) since 1873, and kept at this
penal level for the unprecedently long period of twelve months. The
boom was quickly deflated: prices fell, unemployment soared; but the
targeted dollar exchange rate recovered gradually to make the coveted
gold standard attainable, whatever the harsh internal effects. The
Economisfs index of prices, with 1913 = 100, had barely doubled
during the war and had only reached 212 by March 1919, but shot up to
310 in March 1920, only to fall abruptly to 158 by March 1922.
Registered unemployment was just 4 per cent in October 1920 but rose
sharply to 15.4 per cent by March 1921 and to 18 per cent before the
end of that year. The pound rose substantially to fluctuate between
$4.70 and $4.33 during 1923. In June 1924, in the knowledge that the
Gold and Silver (Export Control) Act was due to expire by the end of
1925, the government set up a Treasury committee to prepare finally for
the implementation of the Cunliffe proposals. In its report it reaffirmed
the City view that 'as a practical present-day policy for this country
there is, in our opinion, no alternative comparable with a return to the
former gold parity of the sovereign' (Report of the Committee of the
Treasury on the Currency and Bank of England Note Issues, 1925, para.
8). On 13 May the Gold Standard Act 1925 became law, obliging the
Bank to sell gold in minimum amounts of gold bars of 400 troy ounces
at £3. 175. lOVid. per fine ounce.
Cunliffe's proposals were completed ten years late, by the passing of
the Currency and Bank Notes Act 1928. One of the purposes of the old
Bank Charter Act of 1844 had been to replace private banknotes with
those of the Bank of England - though it was a long process which took
nearly seventy years before the last note-issuing joint-stock bank, Fox,
Fowler & Co., gave up issuing when absorbed by Lloyds in 1921, so
enabling the Bank of England to increase its fiduciary issue to its
eventual maximum under the 1844 Act, i.e. to £193A million. It took just
a few weeks for the huge Treasury note issue, under the terms of the
new Act, to be absorbed through an increase in the Bank's fiduciary
issue to £260 million. The considerable profit from the Bank's note
issuing was henceforth to go to the Treasury, and more importantly a
more elastic limit was placed on the Bank's power to vary the fiduciary
limit. The Act, as a safety valve for emergencies, allowed the Bank to
exceed the prescribed maximum, with Treasury consent, for a period up
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BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
to six months, after which Parliamentary authority would be required.
Thus in fact and almost unconsciously, a door was opened which would
allow the supply of notes to be varied arbitrarily, according to the
judgement of the Bank or Treasury, instead of being dependent directly
on variations in the gold reserve - an open door which within three
years was to be fully used.
In outward form the basic 1844 structure had been laboriously rebuilt
to face the much stronger storms of the 1920s. It soon became plain to
see that it could not stand the strain. A worried government wondered
what more could be done. To help them find out they set up in 1929
under the chairmanship of Lord Macmillan, a Committee on Finance
and Industry, a forum in which the trade unionist Ernest Bevin,
Professor T. E. Gregory and above all, Mr J. M. Keynes, tried to drag
the gaze of the City, and particularly that of the Governor of the Bank
of England, Mr Montagu Norman, away from the international scene
which always seemed to mesmerize the financiers, to the dismally
mundane spectacle of the internal industrial scene and the long lines of
the unemployed. The composition of the Macmillan Committee
guaranteed that the linkage in its title and remit between 'finance' and
'industry' turned out to be a polarization between the combined
classical views of the City of London and the Treasury on the one hand,
and those of the industrial regions of the North and West allied with
emerging Keynesian economics on the other.
Before turning to trace the rise of this internal conflict, which
continued in various vigorous forms throughout the century, it is first
necessary to see how the external financial policy of the British
government throughout the inter-war period was influenced to an
unusually strong degree by the Bank of England under its 110th
Governor, Montagu Collet Norman. Norman was elected Governor on
15 April 1920 and was deemed so indispensable that he continued in
that office for an unassailable record of twenty-four years. Arguments
still rage as to the merits of his rule, but friend and foe agree that after
such an experience it is certain that no Governor will ever again be
granted anything like such a long reign, or therefore be able to acquire
the personal power that such a long period of office inevitably grants its
incumbent.
No one was more involved in the financial reconstruction of Europe
after the war than Norman. Surprisingly his most influential ally in this
part of his external policy was Keynes. Keynes was the official
representative of the Treasury at the Paris Peace Conference, but
resigned on 7 June 1919 as a protest against the attempt to extract what
he considered to be dangerously high reparation payments from
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
379
Germany. Within barely six months he published The Economic
Consequences of the Peace (1920) where, in his brilliantly fluent style,
he advocated aid for German and Austrian reconstruction, rather than
inflicting revenge (much to the disgust of the French) and a mutual
cancellation of the allied war debts (to the consternation of the United
States). He pointed out that 'the US is a lender only. The UK has lent
about twice as much as she has borrowed [while] France has borrowed
about three times what she has lent' (p.254). 'The existence of the great
war debts is a menace to financial stability everywhere,' he wrote,
adding prophetically that 'there is no European country in which
repudiation may not soon become an important political issue' (p.261).
Although he supported French claims to Ruhr coal, in general he felt
that it would be impossible for central Europe, 'starving and
disintegrating before our eyes' (p.211) to rebuild its economy without
outside assistance. 'I am therefore', he said 'a supporter of an
international loan' to assist immediately with such a task. The idea of a
loan to Austria, initially easier to sell politically, and then to Germany,
was taken up enthusiastically by Norman. In the face of American
pressure, however, Norman was not willing to press for Keynes's other
aim of securing the mutual cancellation of allied debts. Norman
insisted, as he thought any good banker should, on paying British debts
to America in full — and moreover at the pre-war parity, for anything
less would be cheating - no matter who else defaulted, and no matter
how heavy the burden on Britain. How else could the City of London's
superlative reputation be maintained?
Norman strongly influenced the two League of Nations conferences,
at Brussels in 1920 and at Genoa in 1922, in their attempts to get the
gold standard widely re-established in Europe, and boasted about how
the Bank of England 'managed to get a more or less dear money report
out of a more than less cheap money committee' (Sayers 1976, I, 154).
The League of Nations, with Norman's influential backing helped to
raise an international stabilization loan to Austria in 1923 and to
Hungary in 1924. Meanwhile runaway inflation in Germany was
approaching its climax (see chapter 10). A commission under the
chairmanship of the American General Charles G. Dawes, advocated a
modification which would ease Germany's reparation burden, the
payment of which was to be supervised by a Reparations Commission.
It also pressed the urgent need for an international loan of £40 million
together with allied supervision of Germany's financial institutions to
the extent necessary to guarantee the payment of the new schedule of
reparations without placing too much strain on the process of
stabilization then being successfully carried out by Hjalmar Schacht,
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BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
President of the Reichsbank and a firm, close friend of Montagu
Norman. Renewed difficulties led in 1929 to a new allied commission
under the chairmanship of Owen D. Young, a prominent American
banker. As well as helping to raise a new international loan to Germany
and reconstituting the flow of reparations, perhaps the most important
outcome of the Young Commission was the establishment in 1930 of the
Bank for International Settlements, initially to help, as its name states,
in overcoming the problems involved in such huge financial transfers
but later playing a key role as a forum for central bankers. The French
were not greatly enamoured of what they saw as too soft a treatment of
Germany and laid a large part of the blame, so far as financial matters
went, on Keynes and Norman, with results that were to lead to
increased difficulties for British attempts both to maintain the gold
standard and to widen the British system into an international gold
exchange standard.
Apart from their similar pro-German policies, Norman and Keynes
were complete opposites. Norman despised intellectuals: he used to
boast that he came bottom of his form at Eton (though he was wrong
even about that). He detested being put on the mental rack by Keynes
during the Macmillan Committee's inquiries, and though he could
never hope to win a war of words with Keynes (who could?), Norman's
contemptuous and arrogant attitude to his critics is summed up in the
final sentence of his speech when guest of honour at the Lord Mayor's
banquet in London in October 1933: 'The dogs bark but the caravan
moves on' — confidently, but in the wrong direction, one might add (A.
Boyle 1967, 289). Norman gave himself single-mindedly, selflessly and
completely to the Bank full-time for twenty-nine years during which he
drew not a penny in salary. He saw Britain's and the City's interest as
one, and best served by putting the external aspects of monetary policy
first. By so doing he had raised the international prestige of the Bank by
1930 to possibly its highest level. But by relegating internal economic
growth and the problem of unemployment to second place, his
cherished gold standard was doomed to face collapse, and with it much
of the painfully built prestige of the Bank of England.
Keynes's attacks on the gold standard were no mere flashes of
hindsight. Just before the return to gold he wrote 'The British Public
will submit their necks once more to the Golden Yoke, as a prelude,
perhaps, to throwing it off forever at a not distant date' (1925a, 287).
His reasons for considering the parity of $4.86 to be at least 10 per cent
too high were spelt out in his 32-page pamphlet The Economic
Consequences of Mr Churchill (1925b), a veritable polemical
bombshell. Churchill later admitted that episode to be the greatest
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
381
mistake of his political career. Keynes's warning of the strikes that
would follow attempts to reduce prices and wages sufficiently to
compete overseas were quickly followed in the shape of the nine days'
General Strike from 4 May to 13 May 1926, sparked off by the miners'
strike which lasted for more than six months. Admittedly there were
many other causes of conflict besides the parity of the pound, including
chronic underinvestment, obstructive unions, the uneconomic size of
most of the pits, the loss of markets because of French annexation of the
Saar and their occupation in January 1923 of the Ruhr, the switch of the
Royal Navy from coal to oil and so on - but the high value of the pound
and the high rates of interest required to support the pound were much
more than simply being the last straws. What we would today call
supply-side remedial measures, however necessary, were ineffective
given the strong deflationary thrust of government policy which
inevitably followed from government insistence on following the City's
instinctive attachment to the pre-war parity.
All these arguments were paraded at length in the Macmillan report,
the only novelty of which was its emphasis on what has thereafter been
called 'the Macmillan Gap', namely that insufficient provision was
being made by the otherwise excellent financial institutions of the
country to enable small- and medium-sized firms to get the long-term
or permanent funds they required for growth. Although little was done
to fill that alleged gap in the inter-war period, it reappeared in many
similar reports right down to Cruickshank (2000). At that time and
later, traditional bankers denied or played down its existence, giving
what has become the stock reply: 'Today, however, the main trouble is
not a limitation of the amount of available bank credit, but the
reluctance of acceptable borrowers to come forward' (Cmd 3897, 1931,
p. 131). The Macmillan Committee confirmed the idea that domestic
currency management could no longer be 'automatic' but had to be
placed under the authority of the Bank of England, which it went out of
its way to praise for its ready acceptance of evolutionary changes: 'It
would not be a true picture to portray new and lively elements of
contemporary thought . . . held down by the weight of conservatism of
the Bank of England.' That whitewash soon wore off.
Externally, said the report with undeniable evidence, the rules of the
gold standard game were not being adhered to. Countries which like the
USA had received large amounts of gold neutralized the normal effects
on their price levels, while that traditionally large hoarder of gold,
France, had set the value of its currency at too low a standard when
compared with the pound, as had a number of other countries
including Belgium, Japan, Germany and Italy, so making it much
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BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
harder for British exports to compete, and also making it necessary for
the Bank of England to try to maintain much larger gold reserves than
had been necessary in the days when London alone was the
predominant world financial centre. Nevertheless the Macmillan
majority report stubbornly rejected devaluation, which would be 'a
shock to our international credit'. Perhaps its most notoriously
confident pronouncement concerned the role of bank rate: 'There is no
doubt that Bank rate policy is an absolute necessity for the sound
management of a monetary system, and that it is a most delicate and
beautiful instrument for the purpose.' The report was published in June
1931; in a few months Britain went off gold and in June 1932 threw
bank rate into the dustbin for twenty years.
This is yet another vivid illustration of the suddenness of the swing of
the pendulum from one extreme position of excessive reverence of a key
feature of monetary theory and practice to the opposite extreme of
complete dismissal. There are few things more impressive than the
haughty analytical certainty with which fundamental theories of money
are for a time almost universally held, only to be discarded in favour of
a diametrically opposite but equally firmly and widely held new
orthodoxy which in turn lasts until the whole process reverses itself
suddenly a generation or so later. It is this process of polarized change
which is the long-term constant in the history of money, the points of
change naturally occurring during short periods of such obvious crisis
in monetary affairs that thoroughgoing investigations by the monetary
authorities take place accompanied by an intensification of theoretical
discussion by economists and others such as financial journalists, and
even by the usually reticent body of bankers. Born of the crisis, new
monetary practices come quickly into being, accompanied at a rather
more leisurely pace by the appropriate theories which rule until the next
crisis or series of crises cause a reverse swing in the whole process.
Going off gold, discarding the folklore of bank rate, changing from
dear money to cheap money, from free trade to protection, and from
perfect competition towards monopoly marked the beginning of the
revolutionary and more general change from classical to Keynesian
economics in the 1930s. Together these constitute one of the clearest
examples of a number of such dramatically polarized changes during
the headlong course of the twentieth century partly caused by and
largely reflected in public attitudes towards monetary theories and
practices.
'In recent years,' wrote Keynes, with untypical understatement,
'most people have become dissatisfied with the way in which the world
manages its monetary affairs' (1930, II, 405). By 1936 Keynes was
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY 383
beginning to convince the world that 'the characteristics . . . assumed by
the classical theory happen not to be those of the economic society in
which we actually live, with the result that its teaching is misleading and
disastrous if we attempt to apply it' (1936, 3). When the gold standard
was dethroned - by accident not design - the traditional importance
which monetary policy occupied in classical theory was also demoted,
not to be restored for forty years, during most of which Keynesian
concepts (not necessarily quite the same as Keynes's concepts) were to
hold sway.
The trigger which led to the end of Britain's attempt to maintain the
gold standard was the failure of the Austrian Creditanstalt Bank in June
1931, which led on to the failure of a number of German banks and
started a new wave of 'hot money' around the world's financial centres.
The heightened volatility of such large deposits meant that gold
reserves which in pre-1914 days would have seemed ample were now
plainly inadequate, while money intent on finding security was much
less sensitive to high bank rates than formerly. The City's deposits were
much more vulnerable to political fears, including antipathy to Britain's
Labour government, which since its election in 1929 had seemed to the
bankers to be too weak to take the tough measures deemed essential to
cure its poor balance of trade and its unbalanced budget. The
Macmillan report, at an unfortunately critical moment, had exposed
the dangerous extent to which Britain's reserves were dependent on
short-term and therefore potentially volatile deposits. Fears on this
account were increased by the government's hesitation in following the
recommendations of the May report, published on 31 July 1931, for
drastic cuts in expenditure on unemployment and public sector pay.
Despite the Bank of England's success in borrowing £25 million from
New York, and the same from Paris on 1 August, the external drain
continued, partly because on that same day the Bank, with Treasury
consent, had increased the fiduciary note issue by £15 million.
Although this increase was intended only for the three weeks of the
peak holiday season, it sparked fears of an inflationary trend that
would push British prices still higher than those of the country's
competitors.
The intensification of the crisis led to the fall of the Labour
government and its replacement under the same Prime Minister,
Ramsay MacDonald, by a 'National' government on 24 August. The
new government managed to overcome the 'bankers' ramp' sufficiently
to raise a new loan on 31 August of £80 million shared equally again
between New York and Paris. An emergency budget on 8 September
included among its economy measures drastic cuts in public sector pay.
384 BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
A week later as a protest the lower ranks of three Royal Navy ships at
Invergordon refused to muster, a reaction blazoned across the world as
a 'mutiny'. The inevitable acceleration in the loss of the already low
reserves of gold remaining led on 20 September to the official
announcement of the decision 'to suspend for the time being the
operation of the gold standard'. Ironically Norman was not involved in
the decision to go off gold, for at the time he was sailing back from
Canada. He even misinterpreted his Deputy Governor's cable — 'Old
Lady goes off on Monday' - to be about his mother's holiday plans (A.
Boyle 1967, 268). The necessary bill was passed on 21 September. With
not a little understatement it was entitled 'The Gold Standard
{Amendment) Act 1931', but this 'temporary amendment' turned out
luckily to be a permanent abandonment. The gold shackles had been
broken for ever. After an inevitable lag the new freedom to adopt a
cheap money policy helped to give rise to a steady recovery of economic
activity. The forces which led to this momentous decision are fully
analysed by (among others) Professor Moggridge in The Return to
Gold 1925 (1969) and its results followed through in his study of British
Monetary Policy 1924-31 (1972). The policies of the period remain
highly controversial, rekindled by the ERM crises of the 1990s.
Cheap money in recovery, war and reconstruction, 1931-1951
The banks were able to cope successfully with the dramatic change
from dear to cheap money despite the onset of the world depression
because of their structure and mode of operation. Unlike the still
localized, regional banks in the USA and Europe, British banks had
become strong national monopolies and confined their lending almost
entirely to short-term, liquid loans. Thus British banks did not fail,
despite widespread industrial failure. So far as the general public were
concerned during the inter-war period the 'Big Five' referred not so
much to the great powers that emerged victorious from the great war
but rather Barclays, Lloyds, Midland, National Provincial and
Westminster banks, which had completed their amalgamation
conquests during the war and emerged to control some two-thirds of
the total bank deposits of the country, which in 1918 came to £1,500
million. The 115 banks of 1900 had fallen to half that number by 1918
and to thirty-six by 1930 when the Big Five controlled over 70 per cent
of total deposits. By 1939 that proportion had risen to well over three-
quarters of the then total deposits of £2,200 million. The market share
of total deposits in the hands of the Big Five was at least maintained, if
not indeed increased, during the twenty years of cheap money, for in
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
385
December 1951 the Big Five still accounted for nearly 80 per cent of
total UK bank deposits. Their monopolistic power had been increased
despite considerable opposition.
This opposition first showed itself in any prominence as early as
March 1918 when the government set up a Treasury Committee under
Lord Colwyn. Its Report on Bank Amalgamations (Cd 9052, 1 May
1918) recommended that, 'because of the exceptional extent to which
the interests of the whole community depend on the banks', legislation
should be introduced to limit amalgamation and to restrict interlocking
directorships. Next year a bill to that effect was introduced much to the
disgust of the bankers who 'felt that the mere fact of special legislation,
apparently based on the assumption that the Banks are a danger to the
nation, is a slur upon them which they are in no way conscious of
having deserved' (Sayers 1976, I, 236). The bill was withdrawn and a
compromise reached in the 'Treasury Agreement' of December 1919 by
which the banks were to refer any proposed amalgamation to the
Treasury. It was assumed that no amalgamation would be allowed
between big banks, but that smaller bank mergers would in general still
be permitted. In fact some twenty-five mergers took place between 1919
and the end of 1951, mostly of quite small banks, and it was not until
the 1960s that the basic assumption of the Treasury Agreement against
permitting the large banks to merge with each other was again called
into question. By then new forms of competition were emerging to
challenge the monopolistic structure of British banking and to change
its banking practices from those that had shown themselves most
clearly during the twenty years of cheap money to be basically risk-
averse and industry-shy.
There were however some notable exceptions to British bankers'
aloof attitude towards medium- and long-term lending, all the more
significant and surprising because of the lead taken in this innovatory
process by none other than Montagu Norman. As early as 1925 he
encouraged the establishment of the United Dominions Trust to provide
hire purchase facilities for industry. In 1928 Norman persuaded all the
big banks (except the Midland) to join with the Bank of England in
providing capital to set up the Agricultural Mortgage Corporation, so
that long-term mortgages, eventually of up to thirty years, could be
made to help tenants purchase their farms. The Bank helped to set up
the Securities Management Trust in 1929, the Bankers' Industrial
Development Company in 1930 and, in 1934, as an immediate response
to the suggestions of the Macmillan Committee, Credit for Industry, to
supply the capital needs of small firms. Norman helped vigorously in
the 'rationalization' of the engineering, shipbuilding, cotton and steel
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BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
industries. Because of its importance in the defence industry,
Armstrong- Whitworth, long-time customers of the Bank, were helped
to merge with Vickers in the early 1930s. The Bank arranged a loan of
£150,000 for Fairfields Shipbuilding Company in 1933, followed by
further assistance to Cunard which, after absorbing the troubled White
Star Line, went on to build the Queen Mary and the Queen Elizabeth.
In the rationalization of the steel industry the Bank helped to
modernize Stewarts and Lloyds at Corby, GKN & Baldwin at Cardiff,
and most notably enabled Richard Thomas at Ebbw Vale to complete
by 1938 Britain's first continuous strip sheet steel mill.
Professor Clay showed that Norman was motivated by a desire to
forestall more direct government intervention in industry —
rationalization was a preferred alternative to nationalization. He also
makes a valiant but unconvincing case that the Bank was simply
extending its traditional role of acting as lender of last resort from the
banking sphere to industry (1957, 359). A more correct interpretation is
probably that given by Professor Sayers who described 'the intrusion of
the Bank into the problems of industrial organisation' as 'one of the
oddest episodes in its history: entirely out of character with all previous
development of the Bank' (1976, I, 314). There can be little doubt that
Norman's most unusual but warmly welcomed initiatives played a vital
role in re-equipping the engineering, steel and shipbuilding industries to
face the unprecedented military challenges soon to burst upon them in
September 1939, and thus to make some significant if exceptional
recompense for British mainstream bankers' reluctant attitude towards
lending for industrial development. Before dealing with the benefits of
cheap money in wartime it is necessary first to see how cheap money
helped to lift the burden of the national debt and stimulated the
housing drive over considerable, if patchy, areas of Britain; both features
which contributed to the general economic recovery of the country in
the 1930s.
If economists view the inter-war national debt as a 'burden' it is not
because it is created by one generation and carried by posterity, but
rather from the fact that it is carried inequitably and unevenly by a
posterity divided into a relatively few, usually rich, dividend receivers on
the one hand and the majority of relatively poorer taxpayers on the
other hand. Such burdens and benefits are not evenly cancelled out and
are subject to quite arbitrary alteration because of changes in the
general level of prices, with the majority of relatively poor taxpayers
being particularly penalized by deflations - such as that which occurred
in the 1920s. This caused the government to set up a Committee on
National Debt and Taxation, in March 1924, under Lord Colwyn. The
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
387
committee's rather dismal report appeared three years later (Cmd 2800,
1927), and while the thirteen members of the committee were in broad
agreement as to the heavy burden of the debt, they were in dispute as to
whether such a burden was likely to fall (if prices rose), or to rise still
further (if prices continued to fall). The majority, despite the contrary
evidence of Keynes, believed that it would all come right in the end,
especially because in some strange way they believed the gold standard
would help to raise prices. 'If the course of history were any guide,
prices were certain to rise, and as far as can be judged . . . the future
level of prices will be higher' (para. 741).
The four signatories of the minority report were less optimistic, and
after showing how the annual service costs of the national debt had
risen from 10 per cent of total revenue in 1913 to 39 per cent in 1925 and
38 per cent in 1926 (and thus confirmed the popular estimate that the
payment of interest on the debt cost a million pounds for every working
day), concluded that 'Expenditure upon new enterprises such as
assistance to housing schemes, and on the development of existing
services, such as education, is inevitably restricted' (Cmd 2800 356—8).
This was an early, painful, example of public sector investment being
crowded out.
Events were to prove that it was the fall, not the maintenance, of the
gold standard that enabled the burden of the debt to be alleviated. As
soon as the major part of the £130 million of the foreign debt borrowed
in a vain attempt to support the gold standard had been repaid, the
Bank of England was able to bring short-term rates down, confirmed as
we have seen by fixing bank rate at 2 per cent in June 1932. Long-term
rates, much more important than short-term rates insofar as investment
in physical resources was concerned, could not be brought down so
long as investors could, without any risk, earn high returns from
government stock. The 'Great Conversion' of over £2,000 million loan
stock from 5 per cent to 3Vz per cent, successfully arranged by the Bank
of England in July 1932, was therefore of critical importance in laying
the foundations for the house-building boom of the 1930s which itself
was the leading sector in the general economic recovery. Cheap money
thus arose by accident rather than by design, but having been born, the
policy was, with just one hiccup, vigorously sustained for a generation,
with results that were more than coincidentally beneficial (see Nevin,
1953 and Moggridge 1972).
The reduction of the rate paid on consols, combined with the
dampening effect of the world slump on investing abroad, diverted
British savings into physical investment within Britain to build new
houses and factories for the newer industries. The building societies
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BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
took full advantage of the new situation provided by cheap and ample
money. The annual total of new houses built in Britain jumped from
220,000 for the four years 1929-32 inclusive to around 350,000 for each
of the five years 1933—8. The fall in the birth rate coupled with a fall in
construction costs increased the affordable demand for houses just
when the supply of funds was being substantially increased.
Competition among the numerous building societies - they numbered
1,026 in 1930 - caused them to lend a higher proportion of the cost of a
house and to increase the repayment period. As a result the length of
the average mortgage rose from twelve years in 1933 to sixteen years in
1938. Three-quarters of these new houses were privately owned (except
in Scotland where over two-thirds of its inter-war housing was built by
local authorities). The bulk of this construction, together with the
multiplier effects (contemporaneously being expounded by Kahn and
Keynes), took place in the Midlands, London and the South -East where
most of the new, light industries were being established. On the other
hand an emerging regional policy was already trying to divert some of
this expansion to the 'Special Areas' of the North and West even before
the Barlow Report of the Royal Commission on the Geographical
Distribution of the Industrial Population (Cmd 6153, 1940) and the
Luftwaffe's bombs speeded up the process in the 1940s. For the first
time in centuries official policy was attempting, however weakly, to
oppose the centripetal market pull of the City of London. It is also
significant that the many hundreds of building societies widely spread
over the regions had, quite unlike the monopolistic banks, resisted the
pull of London, so that the societies' savings were for the most part
invested locally rather than centrally (Davies 1981).
While cheap money stimulated the building societies it almost led to
the complete bankruptcy of London's discount houses. The severe
slump in international trade and new methods of cabled bank transfers
drastically cut the volume of commercial bills, while the government's
determination ever since the publication of the Cunliffe Report,
reinforced by a similar recommendation in the Colwyn Report (para.
102), to reduce the volume of the floating debt to as low as possible
caused a similarly sharp reduction in the supply of Treasury bills. The
reduced supply of bills during this inter-war 'bill famine' was eagerly
fought for, not only by the various discount houses but also
increasingly by the big powerful banks for, given the depressed state of
industry, they had ample liquid funds available. After bank rate was
reduced to 2 per cent they squeezed the houses even more strongly. The
competition grew so cutthroat that the Treasury bill rate during much
of 1934 was brought down to V? per cent - indeed to take the extreme
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
389
case the rate was forced down to Vs per cent - and this at a time when
the banks were reluctant to lend the call money on which the houses
depended for buying the bills at any rates below 1 per cent.
To prevent the threatened wholesale bankruptcy of the discount
houses, which were considered by the authorities to be vital for the
health of the monetary system, a series of cartel agreements was
arranged by the banks, the houses, the Treasury and the Bank of
England (the latter two sometimes actively conniving and at other times
benevolently looking the other way). The salient features of the
resulting 'syndicated tender system', finally agreed in 1935, were, first,
that the banks would henceforth not compete for newly-issued
Treasury bills nor purchase any less than one week old, thus allowing
rates to rise. Secondly, the houses would no longer compete against
each other for new bills but would jointly tender for the Treasury's
weekly issue at a prearranged price and distribute the total among
themselves according to a prearranged quota. This was again a move
calculated to raise the rate above bankruptcy level. In practice these two
conditions came in time to lead to a third feature, namely that the
houses would agree to bid for the whole of the bills on offer (to 'cover
the tender'). In the 1930s this latter condition was of no consequence in
view of the small amounts of such issues, but it became of more
importance later. A fourth feature was the agreement of the banks to
support the houses in their new policy of dealing in short-term
government bonds by lending to the houses on the security of such
bonds at a rate of 1 per cent. In this way the discount market came
increasingly to be a bond market, a fact which was to be of great benefit
to official war and post-war finance. This system was in full working
order in 1935 (not 1938 as stated by the Radcliffe Report), and thus well
tried and tested before the demands of war had to be met.
In the 1930s three roughly distinct financial trading regions or 'blocs'
emerged: the sterling area, the dollar area and the franc area. When
sterling went off gold, almost all those countries which carried on the
lion's share of their trade with Britain followed Britain off gold -
otherwise they would have priced their goods out of the large market
which Britain provided. These countries included all the Common-
wealth (except Canada), Ireland, the Scandinavian countries, Egypt,
Iraq, Portugal and Siam (Thailand), and a number of South American
countries like Argentina. The dollar area comprised most of the two
American continents, while the franc bloc comprised France and most
of Europe south of the Scandinavian countries. Generally speaking, by
going off gold or otherwise resorting to devaluation a country cheapens
its exports and makes its imports dearer, thereby increasing
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BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
employment in its own country but reducing employment abroad.
Retaliation would lead to successive rounds of this 'beggar-my-
neighbour' policy, resulting, in the classic example of the 1930s, in an
intensification of the slump. This led to calls, especially by the League
of Nations, for more sensible policies, in particular a greater emphasis
on finding new ways of currency stabilization in place of the eroded
gold standard.
Quite apart from the need to avoid the nonsense of competitive
devaluation, some relative stability of rates of exchange was necessary
to restore business confidence in order for international trade to recover
from the depths to which it had sunk in the early 1930s. As early as
April 1932, after the pound had fallen to $3.45, an Exchange
Equalization Account was set up by the Treasury and was further
strengthened in September 1936 when, in conjunction with the
devaluation of the franc and its departure from gold, the UK, USA and
French governments established their Tripartite Agreement. They
promised to co-operate in achieving the greatest possible equilibrium in
the system of international exchanges by mutually supporting each
other's currencies. They did at any rate manage to limit the degree of
fluctuation between the currencies of the three blocs, which comprised
by far the greater part of international payments, and so helped to lift
world trade from the abysmal depths to which it had fallen in 1933. The
Exchange Equalization Account was further strengthened in 1939 on
the eve of war when the vast bulk of Britain's gold reserves were
transferred to it in order to enable it to maintain the 1939 rate of $4.03
throughout the war. The slump of 1929-33 had been the worst in
economic history, yet despite its devastating effects on the 'special
areas', Britain came through it rather better than did most countries.
The causes and extent of Britain's recovery still remain matters of
considerable controversy, ranging from the optimistic assessment given
by H. W. Richardson in his stimulating portrait of Economic Recovery
in Britain 1932—39 (1967) to the brilliantly-written but depressing
picture painted by Corelli Barnett in his book The Audit of War: The
Illusion of Britain as a Great Nation (1986). Whatever might be said of
other industries or of our armed forces, it was undoubtedly true that
Britain's financial institutions were well prepared for the exigencies of
total war.
Despite its peacetime benefits, for one brief moment on the eve of the
war it looked as if cheap money might be abandoned. Bank rate was
raised from 2 to 4 per cent on 24 August 1939. However, unlike the
situation of August 1914, the City showed not the slightest sign of panic
when war was declared on 3 September 1939. Consequently bank rate
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
391
was quickly reduced to 3 per cent on 28 September and back again to its
customary 2 per cent on 26 October, where it was to remain throughout
the war and beyond. Thanks in part to the selective adoption of
Keynesian policies, Britain was to run a 'three per cent war' - or less, as
we shall see - in contrast to the 5 per cent or more of the First World
War.
By the beginning of the Second World War Keynes's ideas had
already so permeated Whitehall and Westminster that high interest
rates were rejected as unnecessary, costly and perverse. Keynes was a
member of an expert committee, chaired by Lord Stamp, which on 20
July 1939 submitted to the authorities a report on Defence Expenditure
and Financial Problems. It is clear that it was Keynes who stiffened the
committee's determination to adhere to really cheap money, which
could readily be achieved if backed up by financial controls on capital
issues and on foreign exchange, and by physical controls like the
rationing of food, clothes and other essentials. However in the crucial
matter of a cheap-money war, the men of action, those with the
primary responsibility, particularly the Governor of the Bank of
England, the Prime Minister and the Chancellor of the Exchequer, were
already convinced by the experience of the First World War that dear
money should be avoided if at all possible. The experience of
successfully managing cheap money since 1932 convinced them that it
was perfectly feasible. The City and the establishment had now also in
practice become, reluctantly and despite themselves, converted to
Keynesianism (Sayers 1956, 143—6). With just a few unimportant
exceptions, 3 per cent became in fact the maximum rate at which the
government borrowed within the United Kingdom.
The government was able to perform this remarkable feat by
adopting a variety of devices additional to those physical and financial
controls just mentioned. First, the British Bankers' Association agreed
to the government's request that as from July 1940 they should refuse to
offer the public a higher rate than 1 per cent for deposits, thus removing
at a stroke the government's most powerful competitor for short-term
funds. Secondly, all government departments with excess funds used
them as necessary to purchase appropriate forms of government debt,
so helping to keep their prices up and of course their rates of interest
down. Similarly Treasury bills were made available 'on tap' not only to
UK government departments as previously, but also to overseas
monetary authorities etc., thus both extending, and smoothing the
market for short-term debt. Thirdly, the government was careful not to
swamp the market with excessively large loans all at one go, but issued
them in more reasonable sizes at fairly regularly spaced out intervals
392
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
with similarly spaced maturities to appeal to different segments of the
market, and then going on to place longer-term debt virtually 'on tap'
to the general public. Fourthly, the government's marketing of all kinds
of savings, from the very small individual sums garnered by the
National Savings Movement to the huge amounts available from the
large financial institutions, was ably assisted by its control of the
propaganda machine. Fifthly, the government began a system of
borrowing directly from the banks through Treasury Deposit Receipts
(rather than having to rely on indirect borrowing via issues of Treasury
bills bought first by the discount houses). The TDR, introduced in June
1940, was a non-negotiable receipt deposited in a bank against a six-
month loan to the government at a fixed (and low) rate of Vk per cent.
To a large extent the TDR supplemented the Treasury bill and grew to a
peak of £2,186 million in August 1945, representing 41.4 per cent of
total bank assets. Sixthly, the discount houses were encouraged by the
Bank of England to amalgamate and to strengthen their capital bases to
enable them to act much more substantially than before as dealers in
bonds. By such means the liquidity of government debt as a whole was
considerably improved and hence made more saleable initially and
more attractive to the holder in general. Thus the government, as by far
the largest borrower, had by means of what the layman would call a
policy of divide and rule, and what the economist would call acting as a
discriminating monopolist, perfected a remarkably cheap and efficient
system of financing the war.
The internal national debt rose from £7,245 million in March 1939 to
£23,745 million in April 1945. The bulk of this increase of £16,500
million was raised as follows: £2,800 million of Savings Bonds with
maturities of from twenty to thirty years at 3 per cent; £3,500 million of
War, Defence and Exchequer Bonds (five to ten years) at rates from Xk
per cent to VU per cent; £4,000 million of small savings (POSB, NSB,
TSB etc) at 2Vz per cent; £2,000 million of Treasury Deposit Receipts
(six months) at Vk per cent; and £3,500 million of Treasury bills (three
months) at 1 per cent. The general pattern is clearly one where the more
liquid the maturity, the lower the rate of interest. The key to the
structure was the stabilization of the Treasury bill rate at 1 per cent.
This was achieved through the Bank of England being willing to
repurchase bills at that rate. This was its so-called 'open back door'
policy. Thus actual short-term rates were usually very much lower than
the formal, front door bank rate of 2 per cent might lead one to assume.
The weighted average even of the funded debt is nearer to 2Vi rather
than 3 per cent, while if, as it should be, the floating debt is included,
then the average rate for the total internal debt is less than 2'/4per cent.
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
393
To call it a 'three per cent war' is an exaggeration which undervalues
the success of the new policy: a 'two per cent war' would be a truer
description than the label historians have generally attached to it, for 3
per cent was the maximum rather than the average rate. The most
grievously costly war in history, in real, human terms was thus financed
by incredibly cheap money.
The financial lessons of all previous wars had been 'the more you
borrow, the higher the rate'. The revolution in economic thought led by
Keynes had helped the government to borrow far more money than ever
before at rates of interest far lower than ever before in such
circumstances. If the Keynesian miracle could work with war finance,
then perhaps with the return of peace the doctrines of his General
Theory of Employment, Interest and Money could combine with those
of the Beveridge Plan to bring in the brave new world of full
employment and the welfare state. Unfortunately, accompanying these
benefits there was a third partner - inflation, an unwelcome cuckoo in
the nest, barely noticed in the beginning, but which was to grow later to
threaten full employment and limit the subsidies on which the welfare
state depended. Before turning to examine the relationship between
internal inflation and the ultra-cheap money of the immediate post-war
years it is necessary first to look briefly at how Britain's external
wartime deficit was financed, for this too had profound consequences
on subsequent monetary policy.
Britain's external wartime expenditures were financed in three main
ways. First by the sale of British investments abroad, which brought in
goods to the value of £1,100 million. Secondly, purchases made in the
sterling area were credited by the build up of 'sterling balances' in
London which amounted to £3,000 million. Thirdly, American Lease-
Lend, which began in March 1941 and was intensified when the USA
was herself forced to enter the war after the Japanese attack on Pearl
Harbor in December 1941. This vital source of food and war material
was ended with brutal suddenness by President Truman on 20 August
1945, without prior consultation with Britain. Keynes's last major
service to Britain was to negotiate in the following months the Anglo-
American Loan of some $4.4 billion for fifty years at around 1.6 per
cent. The rate was generous enough, but the conditions attached to the
loan with regard especially to the convertibility of sterling and non-
discrimination in trade were very soon shown to be as impossible to
fulfil as Keynes had prophesied. These problems, plus the overhang of
the huge sterling balances, much of which was kept in very liquid form,
bedevilled financial and fiscal policy for at least a decade after the war,
thwarting a war-weary nation's desire for a rapid reduction in taxation
394
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
and contributing substantially to the massive total debt, much of which
was actually or potentially highly liquid. Part of the cost of keeping
rates of interest so low was this inevitable counterpart of far too much
potential money chasing the post-war scarcity of goods in Britain and
even more so in Europe, channelling world demand in an unsustainable
rush to America. After barely a month of premature freedom,
restrictions on sterling convertibility had to be reimposed when the
various Orders in Council were consolidated into the Exchange Control
Act 1947. The dollar drain brought convertibility to an abrupt end (Bell
1956,55).
Meanwhile a seemingly grossly ungrateful electorate replaced
Winston Churchill with Clement Attlee as Prime Minister. Attlee's
government, keen to nationalize the 'commanding heights' of the
economy, had strong memories of the deflationary bias of the Bank of
England at the time of mass unemployment between the wars and of
the 'bankers' ramp' that contributed to their losing the 1931 election. It
is not without significance therefore that the Bank of England became
the first post-war institution to be nationalized. In practical economic
terms this was an unnecessary gesture, for the Bank had in the last
resort almost always been under governmental control, as had been
demonstrated most plainly when Lloyd George forced Cunliffe to cave
in to Bonar Law in the First World War. Yet the Bank of England Act
1946 made this power much more explicit, particularly in its double-
barrelled directives contained in clause 4: (a) 'The Treasury may . . . give
such directions to the Bank as, after consultation with the Governor,
they think necessary in the public interest'; and (b) 'The Bank may
request information from and make recommendations to bankers, and
may, if so authorised by the Treasury, issue directions to any banker.'
Although these directives have never been used - and have been
overtaken and strengthened by later legislation - the threat they posed
strengthened the power of the monetary authorities over the financial
sectors of the economy, at least in the short run. However, as the Labour
Chancellor of the Exchequer, Dr Hugh Dalton, was about to learn, the
government's power to influence the City's longer-run expectations
remained much more limited than he imagined, despite his apparently
newly extended powers of control over the monetary system.
Having nationalized the 'citadel of capitalism', the Labour
government was determined to demonstrate its power over the rate of
interest also, by introducing its 'ultra-cheap money policy'. As well as
cutting the cost of servicing the huge national debt, Dalton claimed his
policy would benefit the local authorities, industry at large and the
British Commonwealth as a whole. So much depended on the success of
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY 395
this policy. He started to work first on short-term rates and soon
achieved his aims. In October 1945 the Bank of England raised the price
at which it would purchase Treasury bills (by its 'open back door')
sufficiently to reduce the rate of discount from its wartime 1 per cent to
a record fixed low of 'A per cent, so helping to bring down the whole
range of associated short-term rates. Those dealers and investors
seeking higher rates naturally bought Consols, the price of which -
assisted also by governmental purchases - rose to par by October 1946.
Dalton took advantage of this to issue nearly £500 million of Treasury
2V2 per cent stock (1975) thus apparently signalling his success in
bringing the long-term rate of interest down also. However this rate was
unsustainable. Fears that the price of securities would fall from these
unnatural peaks stimulated a wave of selling. For the first six months of
1947 departmental purchases absorbed these sales, but at the cost of a
rapid increase in the public's bank balances. The national debt was
being monetized at a rate where even the Labour government,
previously expecting a post-war deflation, became frightened of its
inflationary consequences. The final blow, in the shape of the
convertibility crisis of August 1947 caused the government to give up its
attempt to hold down the long-term rate - but it continued with its
ultra-cheap short rates, based on a Treasury bill rate of lli per cent, until
it left office in 1951.
At that time there was no belief in either the need or the efficacy of a
restrictive monetary policy in restraining inflation. The wartime faith in
planning rose in fervour under the socialist government so as to push
monetary policy into abject subservience. The dollar shortage, which
had quickly ended the abortive experiment in convertibility in August
1947, was temporarily relieved during 1948 and early 1949 by America's
generous help to Europe in the form of Marshall Aid (or the European
Recovery Programme). Britain's gold and dollar reserves were
insufficient to support sterling at the overvalued rate of $4.03 fixed
during the war, and again confirmed in the post-war agreement with
the International Monetary Fund. Intensified speculation against the
pound in late summer 1949 forced the government to devalue sterling
on 18 September from $4.03 to $2.80. This large downward step of a 30
per cent devaluation was considered necessary to put beyond doubt
Britain's ability to defend the new rate. It sparked off the most extensive
and rapid realignment of exchange rates - in the form of a devaluation
by almost all the rest of the world against the dollar - ever carried out
up till then. For Britain the success of such devaluation depended on the
extent to which foreign consumers (especially in America) increased
their purchases of goods and services from Britain and the rest of the
396
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
sterling area, plus the extent to which the latter curtailed its dollar
expenditures. In more technical terms, the success of devaluation
depends to a considerable degree on the sum of the elasticities of
demand for traded and tradeable goods and services after allowing for
the short-term disadvantages of the change (in the form of the initial J-
curve effect). It turned out that the devaluation was only a partial
success. The initial difficulties were quickly overcome, the medium-
term results were good, but the longer-term results were overridden by
the effects of the Korean war on the volume and terms of trade between
the USA and the sterling area. At any rate, the forced devaluation of
1949 had enabled Britain to make the fundamental readjustment in its
exchange rate required to reflect the true state of its war-weakened
economy and to set the new level at a rate where it could again build
up its reserves and act once more as a long-term lender to the sterling
area. Throughout the five post-war years no recourse had been made
to the part that might be played by higher interest rates in managing
the economy. Renewed inflationary pressures following the outbreak of
the Korean war in June 1950, followed by the fall of the Labour
government in October 1951, offered the Conservative government
under Churchill an opportunity to reassess the role of monetary policy
in a Keynesian world, particularly when the fourth of the post-Second
World War series of roughly biennial crises duly turned up in late 1951.
The new Chancellor of the Exchequer, R. A. Butler, signalled his
intention of reviving monetary policy by raising bank rate to 2V2 per
cent in November 1951 - and to 4 per cent in March 1952. Thus bank
rate policy, virtually unused for twenty years was back into flexible
operation. It was then changed seventeen times between November
1951 and December 1960. At last it appeared that the era of Keynesian
cheap money had officially ended. This was true only to a very limited
degree. To the consternation of the Conservatives, monetary policy,
despite the restoration of classical techniques, did not seem to work
any more; if anything it worked perversely. In truth, far from monetary
policy regaining its classical importance and replacing Keynesianism,
it was to remain subservient to Keynesian-based policy-making for
another twenty-five years, right up to 1976. Little wonder that the
trend of inflation rose decade after decade.
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
397
Inflation and the integration of an expanding monetary system,
1951-1990
A general perspective on unprecedented inflation, 1934—1990
It is a remarkable fact that the general level of prices in Britain rose
continuously every year from 1934 up to 1990. Moreover, until the deep
depression of 1990-3, there was little sign that this persistent inflation,
2500—,
The Keynesian era:
as a
- problem
The quinquennium of
1970-75 marks the turning
point between the two eras,
belatedly signposted by the
Callaghan speech of
28 September 1976
The
monetarist
era: inflation
perceived as
the prime
problem
:
i
!
r
i
i
l
i
:
:
i
i
1935 '40 *45 '50 '55 '60 '65 '70 '75 '80 '85 '90
Figure 8.1. Fifty-five years of continuous inflation, 1935-1990.
398
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
Table 8.1 Index of retail prices 1935 to 2000s": a non-stop escalator.
Year
Quinquennial
inflation %
Year
Quinquennial
inflation %
1935
1940
1945
1950
1955
1960
1965
21.5
16.2
13.6
12.9
11.5
11.7
1970
1975
1980
1985
1990
1995
2000
12.3
70.4
104.4
46.7
29.3
15.1
14.0
''Quinquennial inflation measures the rise in prices over the five years to the
date given. Note the dramatic return to low inflation in the quinquennium to
1995 at 15.1% and to 2000 at 14.0%.
unprecedented in British history, was likely to end in sustainably stable
prices. Even moderate rates of inflation if they persist for decades can lead
to startling results in drastically reducing the value of money and,
inversely, raising the index of prices soaringly above its starting base-line.
Thus the figures given in table 8.1 and illustrated in figure 8.1 show that
prices in 1990 were in general more than twenty times as high as in the
mid-1930s. They also show that this 55-year period of continuous inflation
divides itself into two sections; the first from 1935 to the early 1970s,
during which period though the trend was upwards, inflation remained
moderate compared with the surge in rates during the second period from
the mid-1970s to 1990. For most of the first period, governments persisted
in pursuing Keynesian-type policies - until the 25 per cent inflation of
1975 caused even a Labour government, at the insistence of the IMF but
against the outspoken opposition of the trade unions, to attempt to adopt
monetarist policies. However even after more than a decade of such
policies the average annual rate of inflation exceeded the average of the
Keynesian years from 1935 to 1970. The monetarist medicine not only
failed to eradicate the Keynesian virus; in actual fact, with the admittedly
glaring exception of the mid-1970s, monetarism was far less successful
than Keynesianism in curbing inflation up to the early 1990s.
Measuring inflation in five-year intervals not only smooths out the
irregularities of exceptional or unrepresentative years, such as the
record low rates of around 1 per cent achieved (because of a 20 per cent
fall in basic import prices) in 1958 and 1959, and the record high rates
of 24 to 25 per cent achieved (following Latin American-type wage
increases) in the mid-1970s, but also enables one to appreciate and
compare more easily the underlying inflationary pressures of different
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
399
periods. Figure 8.1 clearly demonstrates the sharp turning-point in the
1970-5 quinquennium between the Keynesian and monetarist eras,
while table 8.1 shows that the average rates of inflation in the two halves
of the 1980s, at over 45 per cent and around 30 per cent respectively,
when hard-headed Thatcherite policies ruled, were two to three times
higher than the average rates existing from 1945 to 1970, when 'soft'
Keynesian policies predominated. Keynesianism was more deep-rooted
in Britain and took longer to be eradicated than elsewhere. Thus the
UK's long-term inflationary record stands in markedly poor contrast
with most of the competing countries. Between 1957 and 1992 annual
percentage inflation in the Group of Seven major economies was as
follows: Germany 3.4; USA 4.7; Japan 4.9; Canada 5.0; France 6.8; UK
7.2; Italy 8.5, (M. King 1993, 269). Table 9.3 enables a more detailed
comparison to be made with annual inflation rates in USA from 1950 to
2000. These long-run statistics underline Britain's lax anti-inflation
record. Having thus outlined the basic facts of the unprecedentedly long
age of persistent inflation from 1935 to 1990, we shall now look at the
two eras, Keynesian and monetarist, separately.
Keynesian 'ratchets 'give a permanent lift to inflation
Up to 1951 Britain's inflation could be excused as the inevitable
consequence of war and immediate post-war difficulties. Compared with
most other belligerents, Britain's inflation was very mild. Many European
currencies had collapsed completely, the world record for inflation still
being that of Hungary, where by July 1946 its 1931 gold pengo was
equivalent to 130 trillion paper pengos. Second only to Hungary's record,
the Yugoslav inflation of 1992^ reached a monthly peak in January 1994
of 313 million per cent.1 Such runaway inflations simply repeated post-
First World War experience, and were so extreme that they were usually
followed by thoroughgoing currency reforms. Britain, despite its
infinitely milder inflation, was beginning to experience a new kind of
long-run persistent inflation, in which price levels seemed to have lost
their previous tendency to fall during cyclical recessions. Thus, when
energy prices rose substantially (coal in the 1950s, oil in the 1970s), the
general level of prices was pushed up, but failed to reverse itself when
energy prices stabilized or even fell substantially. Part of the blame for this
must be laid at the door of a defunct economist.
Although Keynes died in 1946, Keynesianism became more abundantly
alive than ever. Keynesianism facilitated the godsend of full employment
and encouraged the governmental management of money throughout
most of the world. In so doing, it helped to build into national economic
1 P. Petrovic and Z. Bogetic, 'The Yugoslav hyperinflation', Journal of Comparative
Economics (1999), pp. 335-53.
400
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
systems, at first unconsciously, a series of powerful inflationary ratchets
whereby economic and socio-political forces act asymmetrically to raise,
but hardly ever to reduce, the general level of prices. Each general price
rise becomes, even if initiated by some temporary cause, consolidated
into a basis for further increases, with the natural fluctuations in prices
occurring above an inclined plane, the pitch of which, in Britain's case,
turned steeply upwards in the early 1970s.
The Keynesian ratchets are of two main types, 'real' and 'financial'.
The 'real' ratchets are mainly of the cost-push variety and include the
inflationary effects of rising import prices and especially rising wages,
both being of particular relevance to Britain, given its strong demand
for imports and strong supply of unions. Together these explain why
successive devaluations (and depreciations) were of little avail. Thus
Harold Wilson's famous pronouncement, after the pound was again
devalued, in November 1967, this time by 14 per cent from $2.80 to
$2.40, that 'the pound in your pocket is not devalued' was soon
rendered totally invalid when the import and wage ratchets combined
to cause inflation to accelerate. By far the most pernicious and
persistent ratchet has been the wages-and-pensions ratchet, with the
increasing resort to index-linking effectively writing inflation into the
constitution. For most of the Keynesian period Jack Jones, Secretary of
the Transport and General Workers' Union, and other union leaders,
had more effective control of Britain's money supply than did Lord
O'Brien and other Governors of the Bank of England. Discussion of
these other causes of inflation in any detail would take us too far away
from our subject of money, though because they are directly linked with
the value of money, it is imperative to recognize not only that inflation
has powerful non-monetary causes (contrary to the beliefs of most
monetarists) but also that to cure inflation requires supply-side
measures as an essential complement to monetary policy.
Keynesianism was selectively based on those most influential works
of Keynes which were written during the world's worst slump, a period
of mass unemployment and savage deflation, when very naturally he
ignored the inflationary effects of wage rises and welcomed rather than
deprecated moderate inflation. In a neglected passage of his General
Theory of Employment Keynes notes (quite correctly up to then) that
'full or even approximately full employment is of rare and short-lived
occurrence'. But he then goes on more sanguinely to suggest that
'fluctuations tend to wear themselves out before proceeding to extremes
and eventually to reverse themselves. The same is true of prices'. Still
more optimistically he believed that 'Workers will not seek a much
greater money-wage when employment improves' (1936, 250-1). Yet
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
401
Keynes goes on to give a warning, ignored by almost all Keynesians at
great cost, that his observations concerned 'the world as it is or has
been, and not a necessary principle which cannot be changed' (p.254).
Thanks largely to Keynes's influence, full employment became long-
lasting; but the wage ratchet which he gravely underestimated became
even more long-lasting. Not only did the wage ratchet help to
overthrow Keynesian policies, it also undermined much of the
credibility of the apparently opposite policy of monetarism.
Keynes's repeated and trenchant attacks on saving and his
encouragement of spending - by governments if private spending fell
below the full employment level — gave yet another strong inflationary
bias to post-war policy; while, following the universally welcomed
implementation of the Beveridge Plan, welfare payments became not
only massive in size but adjustable virtually upwards only. Given this
fertile background, new financial institutions flourished and a large
number of new financial instruments and methods were devised by new,
and usually copied later, by well-established, institutions. Together
these developments increased both the nominal amount of money and,
through assisting its increased velocity, added still more to the country's
effective money supply. Once a new monetary habit is adopted, e.g. an
addiction to hire purchase, or an existing monetary instrument is given
extended use, e.g. cheques issued by savings banks and building
societies, thus widening the market, a permanent lift is given to the
potential money supply, thus acting as a 'financial ratchet', more easily
raised than reduced, although fluctuations around the new higher level
will of course continue. Furthermore, while increases in the efficiency
of a monetary system are to be welcomed, yet in circumstances where
inflation is under way strongly enough to give an artificial boost to the
financial sector, such developments, if uncontrolled, may add
significantly to the ready availability of money and credit (bank credit
being money) and so further increase the inflationary potential. Before
turning to examine some of the more important of these developments
in financial institutions we shall look first at the increased velocity of
money, which both reflected and contributed to the inflation of the
Keynesian era, and consider how these matters impinged on the most
influential monetary report of the post-war period.
Although bank rate policy had been restored in 1951, experience in
the following years cast doubt on its efficacy. A perplexed government
set up in May 1957 a high-powered committee under Lord Radcliffe 'to
inquire into the working of the monetary and credit system, and to
make recommendations'. Shortly after it began to sit, another crisis
intervened in September 1957, necessitating what contemporary
402 BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
opinion deemed a 'spectacular rise' in bank rate from 5 to 7 per cent
and thus underlining the urgent need for the Radcliffian
recommendations. The report (Cmnd 827), published in August 1959,
marks the zenith of the Keynesian concept of broad liquidity and the
nadir of any belief in the quantity theory of money, whether this is
interpreted as the old-fashioned classical version or the re-emerging
modern variant of Friedmanite monetarism. No official report has ever
in British history (nor I believe elsewhere) shown such scepticism
regarding monetary policy in the sense of trying to control the economy
by controlling the quantity of money. By delaying for a decade or more
serious consideration of the ways in which the supply of money could
be controlled, one of the essential means of curbing inflation was
thrown away. Warnings such as those given by the Institute of Economic
Affairs in its polemic Not Unanimous: A Rival to Radcliffe on Money
(Seldon 1960) were arrogantly ignored by the new establishment.
For a time the influence of the Radcliffe Report in Britain was all-
pervading, so that it became fashionable for currently published
economic textbooks to ignore the quantity theory even to the point, in
one very popular text, of not mentioning the term at all. The fact that
Milton Friedman in the USA had already by the mid-1950s powerfully
restated the theory in modern form was completely ignored by
Radcliffe, and in the few brief pages where any mention is made of the
supply of money (there is no mention of the quantity theory as such)
the treatment is negative and dismissive, e.g.
If, it is argued, the central bank has both the will and the means to control
the supply of money ... all will be well. Our view is different. It is the
whole liquidity position that is relevant to spending decisions . . . The
decision to spend thus depends upon liquidity in the broad sense, not upon
immediate access to money . . . Spending is not limited by the amount of
money in circulation, (emphasis added; paras. 388-91).
The two main reasons why the report turned against the use of
monetary policy as commonly understood were first the fact that
money-substitutes abound in a modern economy, and secondly that any
given quantity of money (even if it could be defined) could easily be
increased in effect by simply using it more intensively, that is by
increasing its velocity of circulation. In a key passage the report states:
'We cannot find any reason for supposing, or any experience in
monetary history indicating, that there is any limit to the velocity of
circulation' (para. 391). If that really were the case then all the world's
trade could be carried on with a halfpenny.
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
403
In a highly developed financial system the theoretical difficulties of
identifying 'the supply of money' cannot be lightly swept aside. Even when
they are disregarded, all the haziness of the connection between the supply
of money and the level of total demand remains: the haziness that lies in the
impossibility of limiting the velocity of circulation, (para. 523)
It was for such reasons that they reached their astounding conclusion
that monetary policy was secondary: 'We envisage the use of monetary
measures as not in ordinary times playing other than a subordinate part
in guiding the development of the economy' (para. 511).
It is perfectly true, as the Radcliffe and other official reports such as
the First Report of the Council on Prices, Productivity and Incomes
(1958), pointed out, that the velocity of circulation had increased
steadily and substantially during the 1950s. Table 8.2 shows this trend
with the velocity in 1947 at 1.64 rising each year to reach 2.68 in 1957.
Expenditure had doubled even though the money supply had risen by
Table 8.2 The supply of money and its velocity, 1947—1957.*
Year
I
Note
circulation
II
Net
III
IV
Total
domestic
expenditure
V
Velocity of
circulation
(IV+III)
deposits
London
clearing
[banks]
£m
£m
£m
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1351
1229
1238
1244
1291
1370
1462
1551
1657
1765
1828
5454
5703
5761
5800
5918
5844
6012
6225
6171
5998
6059
6805
6932
6999
7044
7209
7214
7474
7776
7828
7763
7887
11181
11837
12457
12911
14975
15644
16803
17721
19154
20296
21139
1.64
1.71
1.75
1.83
2.08
2.17
2.25
2.28
2.45
2.61
2.68
Increase %
1947-57
31.2
23.1
26.1
104.8
"Constructed from Council on Prices, Productivity & Incomes (HMSO 1958),
appendix VIII.
404
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
only about a quarter. The traditional measure of money supply,
banknotes plus net deposits in the London clearing banks, had thus
grown only at a very moderate pace in pre-Radcliffian years and so the
inflationary effect of the money side of the problem was underestimated
because the contributions of the fringe financial institutions were either
completely ignored or substantially overlooked as potential creators of
money. Only the banks, it was thought, could create money; and in any
case, in the Radcliffian view as we have seen, money supply did not
matter very much at all - a view that was very widely held. Thus the
Fourth Report on Prices, Productivity and Incomes, in making the
glaringly obvious point that 'One outcome of inflation is the rise of
prices' went on to make the Freudian slip that 'stopping this rise is not
the main end of Policy' (HMSO 1961, 2-3). Nowhere do they refer to
the need to control the money supply, even to complement their other
and correctly diagnosed objectives of raising productivity and con-
trolling demand and money incomes by fiscal means.
An attempt to draw attention to the inflationary contribution of the
secondary banking institutions was made by the writer in November
1970 as follows:
Corresponding to cost inflation ratchets such as those caused by the current
wage explosion . . . are those monetary ratchets emanating largely from the
dynamic financial fringe. These supply an elasticity in the provision of
finance especially for borrowers initially rejected by traditional sources.
The result is to increase the availability and efficiency of money supply over
the long term, despite the slow growth of deposits in the traditional
banking system ... A flexible and discretionary monetary policy as part
and parcel of a variety of other instruments of control - the Radcliffe
package deal, but with the significant difference that money plays a much
larger role - is therefore essential if inflation is to be curbed.
The writer added that belatedly the Bank of England had seen the
necessity of widening its definition of money from Ml to M2 and M3;
narrow, medium and wide. Furthermore, he noted that 'the wider the
definition, the faster had been the growth exhibited over recent years.
Thus between 1964 and 1969 Ml increased by 14 per cent, M2 by 25 per
cent, while the dynamic M3 rose by 37 per cent. A large part of the
fringe has (belatedly) arrived within the official definitions of money'
(Davies 1971). Although the process, as shown later, had further to go,
the belief that only the 'undoubted' banks could create money and thus
inflation, had at long last been publicly discredited by the monetary
authorities themselves by the end of the 1960s. Despite such growth in
finance, gaps in credit persisted.
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
405
Filling the financial gaps
Like the poor, a fringe of unsatisfied borrowers is always with us, so
that complaints of 'gaps' in the supply of credit are never-ending. Banks
protect themselves by rationing the supply of credit that they
themselves create, not only by raising the price, that is the rates of
interest (and fees) they charge, but also and more commonly by simply
refusing to lend to what they deem to be uncreditworthy borrowers.
Only when reasonably viable sectors of the borrowing public are
normally refused accommodation by banks can the case for the
existence of a gap be justified. We have already seen how the Macmillan
Committee in 1931 exposed the gap in medium-term finance for the
smaller firm. The Radcliffe Committee in 1959 examined four alleged
gaps in the finance available for the following sectors: agriculture;
exports; research and development; and money transfer. With regard to
agriculture, the committee was 'not able to reach the conclusion that
there is any obvious and serious gap in the provision of credit' (para.
931). However with regard to exports the committee did find 'a gap in
the capital market for debts between eight and twelve years' maturity'
(para. 894). This gap existed despite the useful work done by the
Export Credits Guarantee Department which had been set up under the
Board of Trade in 1919. The gap had arisen partly because the ECGD,
together with the other members of the Berne Union (or the
International Export Credits Association), wished to show that it was
'taking a firm stand against demands for excessively long credits' (para.
888). The committee also feared that 'this country is not likely to be the
main beneficiary of an international credit race' (para. 894).
Nevertheless this gap was largely filled shortly thereafter by the scheme
for refinancing private export debt set up by the Bank of England.
Following its philosophy of reducing governmental involvement in
business, ECGD was 'privatized' by the Thatcher government in 1990,
using the merchant bank Samuel Montagu as the vehicle for the
transfer.
The gaps facing small business tend to change over the years, with
new gaps emerging and old gaps changing their guise. Thus although
the Radcliffe Committee praised the achievements of such institutions
as the Industrial and Commercial Finance Corporation (later called
Investors in Industry and later still '3i') and the Finance Corporation
for Industry, the committee remained strongly of the opinion that
various gaps still existed and suggested that banks should provide 'term
loans' for a fixed period of from five to about eight years. This advice
was gradually followed (probably as much the result of aggressive
competition by American banks as of the Radcliffe Report). The
406
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
Radcliffe Committee expressed particular concern that 'There are
special problems about the provision of finance for the commercial
development by small businesses and private companies of new
inventions and innovations of technique' (para. 948). These might
however be overcome 'by setting up an Industrial Guarantee
Corporation with government backing' (para. 949). This view was
strongly reinforced by the conclusions of the Bolton Enquiry into Small
Firms which published its report in November 1971 after it had
commissioned the Economists' Advisory Group to make a detailed
examination of the 'Financial Facilities for Small Firms'. The EAG
found an 'information gap' (p.191) which has been subsequently largely
filled by the establishment of a network of Small Firms Advisory
Centres. Yet the Bolton Report's recommendations appeared to be weak
in the face of its own evidence. It rejected adopting the admittedly most
successful model of the American Small Business Administration, and
even at one point went as far as saying that 'There is now no gap
corresponding to the famous Macmillan Gap' (p.188). Even so it could
not escape the conclusion that
We have found that small firms have suffered and still suffer a number of
genuine disabilities, by comparison with larger firms, in seeking finance
from external sources . . . What is required above all is an economic and
taxation system which will enable individuals to acquire or establish new
businesses out of personal resources and to develop these on the base of
retained profits. Without this no institutional financing arrangements can
preserve the small firm sector, (p. 192)
Six years later the Wilson Committee which was set up to 'review the
functioning of financial institutions' was however still so dissatisfied
with the flow of finance to industry that it decided to make this the
most urgent part of its inquiry and published the results in 1977 three
years ahead of its main report. 'Whether or not the terms of finance are
biased against small firms, there is an "information gap" for them: they
do not know enough about the facilities that are available, and they
often lack the skills that are needed in putting forward propositions for
finance' (Wilson Report 1977, para. 144). Although the information
gap has been partly filled, the gap in actual finance has, despite all
previous efforts, re-emerged on such a scale as to worry the Bank of
England. In its Quarterly Bulletin for February 1990 the Bank gave its
view that
A number of developments suggest that the gap might have widened in
recent years. Two possible gaps have been identified: seed-corn capital and
second-stage growth capital . . . While the industry disagrees on the extent
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
407
to which, if at all, there is a gap in the availability of second-stage growth
capital in amounts of £100,000 to £250,000, there is considerable agreement
that seed-corn capital of less than £100,000 is hard to obtain. (February
1990, p. 82).
Gaps, like history, repeat themselves.
Undoubtedly the most successful result in filling one of the four
Radcliffian gaps has been in the case of transfer payments or 'giro'. The
committee were convinced that 'the experience of other countries
suggests that some simple mechanism for transferring payments . . .
would be an amenity which might be welcomed and used by the public
in this country ... a giro system operated by the General Post Office'
(paras. 963-4). This recommendation, despite the fierce opposition of
the banks, was accepted by Harold Wilson's Labour government, with
the announcement by Mr Wedgwood Benn, the Postmaster General, on
21 July 1965, that a postal giro would be set up. It began operating from
its Bootle headquarters in mid-1968. 'National Giro was the first public
sector bank to be established in Britain for over a century and it was the
first bank in the world to be set up from its beginnings so as to give a
fully computerised nationwide service' (Davies 1973). Although it failed
to equal the achievements of its continental counterparts or to reach the
heights anticipated by its more euphoric supporters, National Giro,
later called Girobank, widened its originally restricted services and was
operating profitably within its first decade. Perhaps its most successful
results have been achieved in its 'business deposit service', handling the
cash, cheque and credit-card takings, mainly of retailers (which
amounted to £39 billion in 1989 and £55 billion in 1992) and using
these to dispense pension, unemployment and other social security
payments via some 20,000 Post Office branches. After twenty-one years
in the public sector it too was 'privatized' by the Thatcher government
when, after a public auction in which a number of British and foreign
banks showed some interest, it was eventually purchased by the
Alliance and Leicester Building Society in July 1990 at a cost of £72.8
million, proving a large mouthful to swallow. It is notable as the first
clearing bank to be bought by a building society. In short the giro had
been a worthwhile public experiment, but it had been introduced too
late to carve out the large and profitable market share of the kind
enjoyed by the continental giros. By the time it came on the scene the
clearing banks and the building societies were busily extending their
custom among the working classes that giro had hoped to capture
largely for itself. At the close of the century a variant of the Macmillan
Gap facing small and medium enterprises was re-discovered when Don
Cruickshank's Competition in UK Banking: A Report to the
Chancellor of the Exchequer -was published (HMSO, 20 March 2000).
408
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
Stronger competition and weaker credit control
In May 1971 the Bank of England issued a consultative document
entitled 'Competition and Credit Control' the chief proposals of which,
after taking into account the views of interested parties, were put into
effect from September of that same year. Competition and Credit
Control had two main objectives, first to stimulate strong but fairer
competition among the various growing financial institutions, and
secondly to provide an improved method by which the Bank of England
and the Treasury could control the total amount of credit now being
supplied by a wider range of institutions than just the traditional
clearing banks. As it turned out, the banks and other financial
institutions immediately swallowed the carrot of competition but
skilfully evaded the cudgels of control - so much so that the controls
had to be substantially strengthened to try to curb the so-called
'Secondary Banking Crisis' barely two and a half years later.
Prominent among the non-bank financial institutions were the
finance houses. The contemporary Crowther Report on Consumer
Credit, which was published in March 1971, showed that although the
earliest of such houses had appeared in the mid-nineteenth century in
order to finance the hire of coal wagons, their mushroom growth in
Britain did not occur until after the Second World War and involved
financing the supply of consumer durables such as furniture and
furnishings, radios, televisions, washing machines, refrigerators and (of
rapidly dominating importance) motor cars. 'Figures as high as 1,900
have been quoted for the total number of houses, but there appears to
be about 1,000 active houses, the bulk of actual business being in the
hands of less than a hundred', of which forty-one were members of the
Finance Houses Association, while the majority of the dozen largest
were subsidiaries of the banks (Crowther 1971, 866-7).
The inflationary power of hire purchase was made evident by the
combination of rising discretionary incomes with the widely advertised
financial facilities offered by the finance houses, and later, by the banks
themselves. As a country's real income rises so its discretionary income
rises by a greater proportion. Keynes had considered it to be a
'fundamental rule' that it was savings that increased more than
proportionally as incomes increased; but now, with the increased
importance of hire purchase, with substantial annual increases in
wages, and with the safety of the welfare state umbrella, it was possible
for such increased spending power to be anticipated, resulting in a
marginal propensity to spend rising temporarily to unity or even higher.
The aggressiveness of the finance houses and the attractions of hire
purchase for a wealthier working class proved a powerful engine of
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
409
inflation. (An excellent early, though generally overlooked and
neglected, analysis of the contribution of hire purchase to the
persistence of inflation was given by Dr Paul Einzig in 'The dynamics of
hire-purchase credit', 1956.) If customers could get the credit they
demanded from non-bank financial intermediaries (and many of them
were not then considered worthy of being traditional bank customers),
then trying to control the aggregate supply of credit just by means of
the Bank of England's traditional controls over the clearing banks was
bound to fail. Increased competition meant that new and wider
methods of control had become essential. This accounts for the
fundamental change attempted by the Bank in 1971.
By its new policy of Competition and Credit Control the Bank
changed from rationing bank credit through quantitative ceilings on
bank advances and qualitative or selective guidance — which as well as
being unfairly restrictive in being confined to the clearers also gravely
distorted the flow of credit. Instead the Bank wished to rely on the more
generally pervasive influence of the price mechanism, with variations in
the rate of interest becoming the main weapon, although it retained its
power, as recommended by the Radcliffe Report, to call for Special
Deposits from the 'banks', now more widely defined. The two former
ratios of control, the old 8 per cent 'cash ratio' and the rather newer 28
per cent 'liquidity ratio' were replaced by a stipulation that all the
banking institutions had to keep a minimum of HV2 per cent of their
deposits in the form of 'eligible reserve assets' (which included balances
at the Bank of England, Treasury bills and money at call with the
discount market). The clearing banks agreed to end their interest rate
cartel (which they had established in the 1930s) and thus began to
compete for loans and deposits by means of more competitive interest
rates. The Bank of England abandoned its age-old bank rate and
replaced it with a Minimum Lending Rate which was henceforth
normally to be determined automatically by market forces, rather than
set arbitrarily by the Bank (though it retained the right to do so). At
about the same time the controls over hire purchase were removed. All
was set for an unsustainable boom, a daredevil dash for growth, led by
Anthony Barber, the Conservative Chancellor of the Exchequer from
1970 to 1974. (He later became Chairman of Standard Chartered Bank,
which in November 1973, just a few weeks before the crash, purchased
Julian S. Hodge & Co. Ltd, the example par excellence of the new post-
war finance house.) The deal was termed 'one of the best-timed
multi-million pound sales in history' (Reid 1982, 80).
The year 1970 marks a watershed in the relative position of the
London clearing banks when compared both with the building societies
410
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
and with the overseas banks in Britain, for it was in that year that
personal savings in the building societies first exceeded those in the
London clearers, and also it was the first year for the total of deposits in
American banks in Britain to exceed that of the London clearing banks.
The dominance of the clearers in the British monetary system, a
dominance which had lasted for just over half a century, was over. At
that time it was the American banks that formed by far the most
important sector of the overseas banks stationed in London, but the
whole of the overseas sector was growing rapidly at a pace much greater
than the growth of the clearers, even after their shackles were removed
in 1971. The whole of the British financial system was in the process of
rapid change, facing the authorities with unprecedented challenges of
how to control this more complex, and expanding flood of credit. In
trying to see how they coped - or failed to cope if the control of
inflation is the measuring rod — we shall look first at the changes in
building societies and savings banks before going on to examine the
growth of the American and other overseas banks, together with the
rise of the Eurocurrency market.
The building societies were able to steal a march on the clearing
banks and to capture a growing share of a substantially rising total of
personal savings partly because they greatly enlarged their branch
network and partly because they were in the lucky position of being
generally ignored insofar as monetary policy was concerned; for
according to the generally accepted theory, only the banks could create
money and hence needed to have such powers controlled. The
Keynesians, especially after Radcliffe, tended to ignore or play down
the importance of money, while the monetarists focused their
monocular vision solely on the narrower ranges of money — the non-
bank financial intermediaries were beyond their pale. The building
societies, unconstrained, were able to overtake the banks in their share
of the lucrative, growing personal savings market. The total of personal
savings rose substantially in the thirty years after 1950, during the
whole of which time the personal savings ratio also rose - as is shown in
table 8.3 - despite the erosion of the unit value of savings in the highly
inflationary 1970s. It takes a long time to change personal habits, so
that it was not until the 1980s that the ratio fell significantly. The
building societies and the insurance and pension funds took an
increased share of this market; the banks' share increased only
sluggishly; while that of the national savings movement fell
substantially. Until 1969 the banks' share exceeded that of the societies,
but throughout the 1970s, with the single and very marginal exception
of 1974, the share held by the societies exceeded that of the banks. At
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY 411
Table 8.3 The rising trend in the personal savings ratio, 1950-1979.*
Year
/o
Year
<>/
/o
Year
/o
17 Jv)
1.0
17 o\)
1 A
I A
17/ U
O.O
17 J X
I./
o.y
Q C
O.J
17 'J Z
J.J
1 Q^l
IVoZ
/ .0
1"/ L
y.j
1953
3.9
1963
"7 f
7.6
1973
10.7
1954
3.4
1964
8.1
1974
13.7
1955
3.9
1965
8.6
1975
13.5
1956
5.5
1966
8.7
1976
12.8
1957
5.1
1967
8.2
1977
12.3
1958
4.3
1968
7.7
1978
12.8
1959
5.3
1969
7.8
1979
14.4
Average for the 1950s = 3.82%
Average for the 1960s = 8.06%
Average for the 1970s = 11.66%
(From 1980-88 the ratio fell, then rose in 1989-90, averaging 9.30 per cent for
the 1980s.)
''Percentage of personal disposable income at current prices.
Sources: 1950 to 1971, Page Report (Cmnd 5273) para. 28; 1972 onward, CSO
Financial Statistics.
first the banks did not seem to be very worried by the growing
competition of the societies, and in any case the banks were precluded
from competing by the severity and duration of their inequitable
constraints; but even after the restrictions were removed and a more
equitable regime came in with Competition and Credit Control in 1971,
the banks felt that there was plenty of room for both institutions in the
still rapidly expanding savings market. The total amount of personal
savings soared during the 1970s, trebling from £3,123 million in 1970 to
£10,044 million in 1975, and almost doubling again to reach £19,264
million in 1979 (CSO, Financial Statistics, August 1980).
The building societies were able to tap this growing reservoir of
savings through their basic strategy of greatly extending their network
of conveniently sited and 'homely' branches. Branch numbers grew
from 659 in 1952 to 2,016 by 1970 and to 5,147 by 1979. The number of
share and deposit accounts in building societies rose from 2,910,000 in
1950 to 10,883,000 in 1970 and to 31,551,000 in 1980, while their total
assets grew from £1,255,872,000 in 1950 to £10,818,772,000 in 1970 and
to £53,792,870,000 in 1980 (Davies 1981, 52). The building societies
thus thrived by being ignored, overlooked or underappreciated by the
412
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
monetary authorities and by their potential competitors. The Radcliffe
Report, in outlining the Registrar's duties of control over the building
societies, stated simply that 'the purpose of supervision is the
protection of the public from the consequences of imprudent or
fraudulent management, and it has no monetary significance" (para.
296, emphasis added). Not until the mid-1970s did the Bank of England
really begin to show much concern about the societies. By 1980 opinion
as shown in the Wilson Report was surprisingly hostile to the societies'
aggrandizement, yet even Wilson was forced to admit that 'Societies in
the course of expanding their branch networks appear to attract more
new business than might otherwise be expected and have lower than
average administrative costs' (para. 375).
Because savings are a residual from large totals, one cannot be too
adamant about the exactness of the percentage for a given year; but the
averages for the decades smooth out such variability and show very
closely the rise in the trend of the personal savings ratio from 3.82 per
cent in the 1950s, through 8.06 per cent in the 1960s to the unusually
high level, for Britain, in the 1970s of 11.66 per cent and 9.30 per cent in
the 1980s. It was this mainly rising trend that helped the building
societies to achieve such a successful growth rate throughout most of
the post-war period. (An excellent assessment of the 'Fall and rise of
saving' from 1980 to 1990 is given by Professor K. A. Chrystal 1992.)
International comparisons for the period 1970-92 show average
personal savings ratios of around 19 per cent for Japan, 16 per cent for
France and 13 per cent for West Germany - but with only 10 per cent
for the UK and 7 per cent for the USA (Bundesbank Monthly Report,
October 1993).
The success story of the building societies was not repeated by the
savings banks, which were thoroughly investigated by the Committee to
Review National Savings set up under Sir Harry Page in June 1971 and
which published its report in June 1973 (Cmnd 5273). Sir Harry tried to
move the stolid national savings 'movement' on to a more modern
plane, and in particular attempted to push the Trustee Savings Banks
into becoming 'the third force' in British banking; but the inertia of
their old-fashioned ways greatly delayed the implementation of what
had become plainly well-overdue reforms. A few telling examples must
suffice. The rate of interest paid on ordinary deposits by the post office
and TSBs had remained unchanged at 2'A per cent from 1888 until 1971
when, one hundred and ten years after the founding of the POSB it was
raised to 3 'A per cent, and to 4 per cent in 1973. The moneys raised went
into government coffers: a policy of robbing the poor to pay the rich.
The authorities ignored Page's despairing plea that the National Giro
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
413
might 'in the longer term' be combined with the National Savings Bank
(para. 400). The TSBs were painfully slow in carrying out Page's
recommendations on mergers and on extending the banking services
which they needed to provide. Eventually the seventy-three separate
TSBs were combined into fifteen groups and then into two main
groups, one for Scotland and one for England and Wales, together with
a Central Bank in London. For most of the post-war period the virility
of the building societies stood in stark contrast to the senility of the
national savings movement and the slow progress of the TSBs. By the
1980s both the building societies and the savings banks were
successfully trespassing on ground that had previously been the
preserve of the clearing banks.2
Further competition was provided by the Scottish banks, which
needed 'Lebensraum' and therefore intensified their activities south of
the border. Thus for example in 1977 the Royal Bank of Scotland fully
absorbed William and Glyn's network of branches in England and
Wales, while the Bank of Scotland which had already taken over North
West Securities in 1958 went on to absorb Sir Julian Hodge's second
banking creation, the (Commercial) Bank of Wales, in 1986. In quite a
contrast to the 'Anglo-Scottish War' of a century earlier this new
southern incursion produced no hostility. On the contrary, the Bank of
Scotland was voted, according to a 1989 survey by The Economist and
Loughborough University 'the most admired bank' by its banking peer
group. A related, significant but generally neglected, aspect in the
growth of secondary banking was its regional dimension, seen perhaps
most clearly in the rise of Cardiff as a financial centre, largely as a result
of Sir Julian Hodge's entrepreneurial initiatives. The formation of new
banks (not simply changes in designation) is rare in modern Britain
compared for instance with hundreds annually in the USA. It is
therefore noteworthy that a third new Welsh bank, the Julian Hodge
Bank Ltd, was opened in Cardiff in 1988. Despite the recession of the
early 1990s, which saw the Bank of England having to keep forty small
banks 'under particularly close review', its successful progress was
indicated by an independent research report on 'Top Performing Banks,
1993' which placed Julian Hodge Bank Ltd third out of the 239
authorized institutions surveyed (Searchline Publishing 1993). A further
indication of financial development in Wales is shown by the rise in
employment in 'banking, finance and insurance' from 37,000 in 1971 to
90,000 in 1991, compensating to a welcome degree for the decline in
employment in its traditional heavy industries ( Welsh Economic
Trends No. 13 1992). (Moreover in Britain's qualitative social balance-
sheet, jobs in banking are infinitely safer and much more congenial,
2 Economic logic finally prevailed when Lloyds Bank merged with TSB and Cheltenham
& Gloucester Building Society in 1995-6 to form Britain's biggest bank. See also p. 431.
414
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
cleaner, less arduous and more open to both sexes than coal mining and
have a smaller import-content than steel making. This is not to decry
the economic significance of manufacturing.) Still much more
important with regard to direct competition with the core business of
the clearing banks, discount houses and merchant banks, was that
pressed home aggressively by banks from overseas, magnetically
attracted to London, the major pole of global banking.
The American-led invasion and the Eurocurrency markets in London
Although about a dozen major foreign banks had established themselves
in London in the thirty years before the First World War (including
Comptoir National, Credit Lyonnais, Societe Generale; the Deutsche
and the Dresdner; the Swiss Bank Corporation and the Yokohama
Specie Bank) only some seven US banking-type institutions, of no special
importance and carrying on a variety of financial and commercial
operations, had managed to set themselves up in London. US legal
restrictions had held up such developments until after the Edge Act
Amendment of 1919; even thereafter no real growth took place until the
1960s saw a headlong rush of US banks into London. There were still
only seven American banks in London when, lumped together with the
other overseas banks, they were cursorily examined by the Radcliffe
Committee in 1959. This committee was barely curious about overseas
banks: 'We did not take oral or written evidence from foreign banks . . .
only their relative unimportance in the domestic financial scene can
excuse our summary treatment of them' (para. 197). The original Trojan
horse, while equally cursorily examined, had at least excited more
interest. Two years later, when the United States Commission on Money
and Credit reported, they took even less notice of their own Trojan horse
strategically positioned in central London [Money and Credit: their
Influence on Jobs, Prices and Growth 1961). The Radcliffe Committee
did however note that American banks have ventured further and more
actively into (domestic) business than the other overseas banks', yet
consoled themselves by going on to say that 'this domestic business is
negligible in comparison with the activity of the clearing banks' (para.
201). Within ten brief years the situation was dramatically changed,
though even then its significance was still complacently underestimated
by the authorities and by most academic commentators.
In 1959 the total value of deposits in American banks in Britain, at
£163.2 million, came to only 2.5 per cent of the £6,552.4 million held in
the London clearers, and was equivalent to only 24.3 per cent of the
£670.9 million held in the Scottish banks (Radcliffe 1959, Memoranda of
Evidence, II, 215). Between 1959 and 1970 twenty -nine of the most
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
415
powerful American banks rushed to join the seven already there, starting
with First National Bank of Chicago in 1959, Chemical Bank in 1960
and Continental Illinois in 1962. Six others followed in the next three
years, culminating in a rush of no less than twenty new arrivals in the
three years from 1968 to 1970, all of these being 'billion-dollar banks'.
Such growth continued afterwards, but it is clear that by 1970 a
fundamental change had already taken place. As Dr Ian Thomas, one of
the earliest economists to note the significance of these events, explains:
It is unique in financial history for banks of another country to have
established installations on such a large scale and for their activities to have
grown to occupy a significant position in such a highly developed and
sophisticated market as the U.K. For this to have occurred within such a
short period of time is in itself notable. For it to have taken place with so
little public discussion or academic treatment is even more remarkable.
(Thomas 1976, ii)
By the end of 1970 deposits in American banks in Britain, at
£11,566.5 million had increased seventy-one times since 1959 and for
the first time exceeded the £10,606 million then in the London clearing
banks. They were now ten times larger than the £1,118.6 million in the
Scottish banks. Meanwhile the deposits in other overseas banks were
also growing, but not at the spectacular rate achieved by the American
banks, which were outright and aggressive leaders.
The challenge which such new developments posed for monetary
management was underlined by Sir Leslie O'Brien, Governor of the
Bank of England, in the First Jane Hodge Memorial Lecture given in
Cardiff on 7 December 1970:
It was not so many years ago that domestic banking in this country was
conducted virtually entirely by the deposit banks; that is primarily the
London clearing banks . . . Only some dozen years ago the other banks in
London accounted for little more than 10% of the deposits held with the
banking sector as a whole. Since then their deposits have increased twenty
times to over £17,000 million . . . Their resident sterling deposits are now
approaching £3,000m. This represents around 20% of such deposits with
the whole banking sector. (BEQB, March 1971)
The oligopoly of the Big Four had ended. From being the world's biggest
banks in the inter-war and immediate post-war period, they had now
been well and truly overtaken even in their home capital. At the same
time the financial system had, largely on foreign initiative, built up a
new market for money alongside - or 'parallel' as it came to be called -
the old traditional discount houses, so that the banking institutions were
416
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
now able to borrow directly from each other in the 'inter-bank market'
rather than having to use the discount houses as the intermediary. No
longer could the City be ruled by the nods, winks and eyebrow-raising of
the Governor, nor even by the simple cash and liquidity ratios that, as we
have seen, with various modifications, previously provided the levers by
which the Bank of England with the help of the discount houses
controlled the supply of credit. But just at the time when new sources of
finance from so-called 'secondary' British and foreign banks began to
flood the City - a situation crying out for stronger controls - the
monetary authorities welcomed such competition so enthusiastically
that the old, admittedly outworn, controls were abandoned. Their more
equitable but far looser replacements were totally unable to hold back
the precipitate boom which led inevitably to the crash of 1974. Because
that crisis barely halted the foreign invasion we shall first continue to
trace the subsequent scale of the influx and then examine how the
related parallel markets came into being before considering the salient
features of the secondary banking crisis.
The sizes of the various kinds of British and overseas bank deposits
as at July 1980 are given in table 8.4 and their most striking aspects are
shown graphically in figure 8.2, from which may clearly be seen the
predominant position held by the overseas banks. Insofar as total
deposits are concerned their share had increased to 70 per cent, while
their holdings of sterling deposits had risen from the 20 per cent noted
by the Governor in 1970 to 25 per cent in 1980. Only 11 per cent of non-
sterling deposits and only 30 per cent of total deposits were held in
British banks; the Trojan herd had taken over the stables. The American
banks were still the major operators in 1980 with 28 per cent of total
deposits and 34 per cent of non-sterling deposits: but, significantly, the
Japanese banks with 16 per cent of total deposits and 23 per cent of
non-sterling deposits were beginning to show the shape of things to
come. By December 1989 Japanese banks' holdings of sterling, at
£33,315 million were practically double those of American banks, at
£17,338 million, while Japanese holdings of other currencies in their
London banks, at £246,342 million were 2Vz times those of US banks, at
£96,836 million. American banks had led the invasion, but other foreign
banks, particularly the Japanese giants, had enthusiastically followed
their example. The Japanese banks had gained 43 per cent of overseas
banks' share of non-sterling deposits by December 1989 (BEQB,
February 1990). As with deposit sizes, so with the number of officially
categorized banking institutions, overseas banks had been in the majority
in Britain for two decades by 1990. Thus as table 8.5 shows, of the 588
institutions included by the Bank of England within United Kingdom
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY 417
Table 8.4 Bank deposits, sterling and non-sterling, in all banks in UK, July
1980 (£ million).
Bank
type
Sterling
%
Other
currencies
%
All
currencies
%
London
36649
58
10095
6.5
46744
22
clearing
Scottish
4477
7
1370
1.0
5847
3
JN. Ireland
1325
z
18
1343
Accepting
4548
7
5853
3.5
10401
5
nouses
Total UK
46999
75
17336
11
64335
30
American
7821
12
51296
34
59117
28
Japanese
782
1
33759
23
34541
16
Other
7302
12
48490
32
55792
26
overseas
Total
15905
25
133545
89
149450
70
overseas
Total
62904
100
150881
100
213785
100
all banks
Source. BEQB (September 1980).
Banks as at 12 January 1990, 361 or 61 per cent were overseas banks
compared with 227 indigenous banks (and some of the latter, such as
Northern Bank, Clydesdale and Yorkshire Bank were owned by an
Australian bank, Guinness Mahon by a New Zealand bank, and Morgan
Grenfell by a German bank). Public awareness of this phenomenon has
been muted in the country at large because only in the City of London
does the physical presence of overseas banks become visibly marked. The
ubiquitous and costly branch network of the clearers and the branching
mania of the building societies so essential for retail deposit gathering
and money transfer in the past, have disguised for most of the public the
externally induced transformation in the British financial scene.
Among the many reasons which had enticed the American banks into
London in this period was, first and foremost, the freedom from the
irksome constraints they suffered in their home country, such as
restrictions on branching, the ceiling on interest rates (Regulation Q)
and compulsory reserve deposits. Second came the need to follow their
US corporate customers who were substantially expanding their
business interests in Britain. Thirdly, there were the strains produced by
418
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
£63 Bn £151 Bn £214 Bn
Source: BEQB (September 1980)
Figure 8.2 Sterling and non-sterling bank deposits in UK: British and overseas
banks' market share in mid-July 1980.
the large US balance of payments deficits which led to restrictions on
raising dollar loans in the USA - but not on dollar loans raised abroad.
Fourthly, the US Interest Equalization Tax of 1963 similarly gave an
incentive to hold dollars outside the USA, London being easily the most
convenient haven. Fifthly, the Voluntary Credit Restraint Program,
intended to limit inflation within the USA, stimulated the raising of
dollar credit abroad. Sixthly, added to these economic factors was the
strongly held political fear that foreign-owned dollars within the USA
might be expropriated or at least frozen, and so become unavailable for
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
419
Table 8.5 Numbers and types of British and overseas banks within the United
Kingdom, January 1990. i:"
British banks
Number
Overseas banks
Number
Retail 21
Merchant 31
Discount houses 8
Other British 167
British total 227
American
Japanese
Other overseas
Overseas total
44
29
288
361
Total number of officially designated banking institutions in UK as at 12
January 1990 = 588 (formerly officially known as 'the Monetary Sector').
''Though the overall total number of banks was roughly similar, the
proportion of British banks had fallen significantly further by the year 2001.
London retained its magnetism for overseas banks [Financial Services
Authority, 3 October 2001).
Source: BEQB (February 1990) .
repatriation. That this fear had a concrete basis in fact was repeatedly
demonstrated by US governments. The USSR had long kept for that
reason a significant amount of dollars in their Moscow Narodny Bank
branches in Paris and London; and it was the vigorous use of such
balances that is generally held to be the model origin of the Eurodollar
market. When as a result of the Suez War of 1956 the US government
temporarily froze the dollar assets held in the USA by the belligerents,
such political fears were revived with the result of diverting much of the
rising flow of Arab oil money into Europe — fears later reinforced during
the American quarrels with Iran. Seventhly, the widespread adoption
during 1958 and 1959 of convertibility of currencies into dollars
(especially) and into each other gave an enormous fillip to the marketing
of loans in other nations' currencies: the foundation of what was to
become the trillion-dollar Eurocurrency and Eurobond market had been
established. The Bank of England - not usually given to hyperbole -
rightly stressed the connection between convertibility, foreign deposit
growth and the rise of the Eurocurrency market. In Governor O'Brien's
speech, already noted above, he showed that 'This phenomenal
expansion came after the widespread move to the convertibility of
currencies at the end of 1958 and has been associated with the growth of
the euro-dollar market' [BEQB, March 1971 emphasis added).
An eighth causative factor was the rise in the use of the 'certificate of
deposit' by which a bank certified that the original holder had made a
large deposit of cash for a fixed time. This gave the bank the certainty that
420
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
the deposit would not be removed until its fixed maturity date (ranging
from one month to two years) but yet enabled the depositor to sell his
deposit, at the sacrifice of some part of the interest, if he wished to obtain
cash before the maturity date. Certificates of Deposit first originated in
New York in 1961, and dollar CDs were first issued in London by
Citibank on 13 May 1966, with sterling CDs being issued by American
and British banks two years later. Their liquidity was further enhanced
when First National Bank of Chicago introduced a secondary market for
such negotiable CDs. Already by 1971 the value of CDs outstanding on
the London market exceeded £2,000 million. Complementing the growth
in deposits was that of borrowing, and as our ninth contributory factor in
the rise of the parallel market was the very substantial rise in borrowing
by local authorities after 1955, when their traditional access to the Public
Works Loan Board was restricted and they were pushed out on to the
private sector, stimulating a specialized market in local authority deposits
in which foreign as well as British banks participated. A tenth factor goes
under the awkward description of 'disintermediation', whereby large
borrowers, instead of borrowing from their bank, used their bank (or
banks) as agents to arrange borrowing directly from the public, including
other large companies with surplus cash, who found such loans more
profitable than passively depositing their surplus funds with their
bankers. A particular aspect of many variants of such devices is the
market in commercial paper, although this market in London did not
quickly take on the popularity it had acquired in New York. An eleventh
factor was the increasing importance of specialist money brokers and
similar agents who helped to bring the various newly developing forms of
borrowing and lending into fruitful contact, so that the new and old
money and capital markets became more fully integrated.
Just as bank rate had been the key rate in the traditional discount
market, so the London Inter-Bank Offer Rate, or LIBOR, became the key
rate in the parallel markets. In the development of these new markets, no
single cause among those mentioned above would have sufficed; but
together they produced a financial revolution in which the Eurodollar
played perhaps the most spectacular but certainly not the only major role.
The City of London had gained its world status on the strength of
sterling; it had retained that status as sterling declined by becoming the
most convenient and efficient centre of operations in Eurodollar and other
foreign currencies by international banks, especially, as well as by
indigenous banks. Just when these new, highly competitive, markets were
at full stretch in the early to mid-1970s the City was stunned by the
secondary banking crisis.
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
421
The monetarist experiment, 1973-1990
The secondary banking crisis: causes and consequences
Since most modern money is bank money, bankers' attitudes, beliefs,
fashions, moods, philosophies or theories (call them what you will)
profoundly influence the creation and distribution of money. Thus in
addition to the institutional metamorphosis explained above, the
underlying cause of the excessive credit creation which led up to the
1973-5 banking crisis was a change in banking theory, from 'asset
management' to 'liability management'; and the main consequence of
the crisis was a sudden and profound change in bankers' attitudes, and
in the public's attitude to bankers, that led to Britain adopting, for the
first time in its history, a written financial constitution, something that
had previously been completely alien to it. There have been four main
banking theories which, consciously or unconsciously, have guided
bankers' actions in the course of the twentieth century. First was the
'neutral' or 'cloakroom banking' theory; secondly the 'asset man-
agement' theory; thirdly the 'liability management' theory; and finally
the 'weighted capital adequacy theory' which now rules the roost. One
does not have to assume universal acceptance of these theories, for all
bankers do not think - or act - alike. However, the historical evidence
of the herd instinct is so overwhelming (witness the fashionable surge to
property lending and to Third World loans in the 1970s and to
mortgage lending in the 1980s) that the acceptance of the proposition
that most banks think alike supports some variant of the theoretical
outline now being suggested.
The 'neutral banking theory' was put forward most influentially by
Sir Walter Leaf (1852-1927) classical scholar, a founder member of the
Institute of Bankers and chairman of Westminster Bank, in the early
1920s. The theory held that bankers could lend only what the public
had decided, in the course of their everyday business activities, to
deposit with their banks. It was the public, not the banks, — with the
exception of the Bank of England - that caused any variation in total
bank deposits. The banks could not 'create money out of thin air': they
were neutral and simply changed deposits into cash and vice versa as
demanded by their customers. It was of course very convenient at a time
when the trade unions and socialists were crying out for nationalization
or at least for some greater measure of control over the monopolistic
'Big Five', for the bankers to play down their power. The theory seemed
to accord with plain common sense and with the cautionary practices
of the thousands of bank managers throughout the country. The theory
was however easily demolished: micro sense made macro nonsense.
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BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
Bank deposits already exceeded cash by around ten to one and bankers
were clearly much more than cloakroom money-changers for the public.
'Practical bankers, like Dr Leaf,' said Keynes in his Treatise on Money,
'have drawn the conclusion that the banks can lend no more than their
depositors have previously entrusted to them. But economists cannot
accept this as being the commonsense which it pretends to be.' In a
closed banking system a loan made by a banker soon reappears as a
deposit in that or some other bank. Every loan creates (with certain
exceptions that are subsidiary to the main argument) a deposit. As
Keynes explained: 'Each Bank Chairman sitting in his parlour may
regard himself as the passive instrument of outside forces over which he
has no control; yet the "outside forces" may be nothing but himself and
his fellow-chairmen and certainly not his depositors' (1930, 1, 25, 27).
From the 1930s to around the mid-1960s the 'asset management'
theory prevailed almost unchallenged, whereby the limit on the banks'
power to create credit depended on keeping a certain ratio of liquid
assets to total deposits, the ratio being arrived at by practical experience
and confirmed by the authority of the Bank of England. By means of
open market operations the Bank of England could influence the size of
bankers' balances which the clearers needed to keep at the Bank as part
of their cash reserves; and by means of bank rate it could also influence
the rates which the discount houses paid the banks for call money and
the price at which the banks could sell or buy their other main liquid
assets, viz. Treasury and commercial bills. Conventional banking
customs and central bank control were thus neatly dovetailed together.
As we have seen, the banks in that period did not compete for deposits
(except very indirectly); for part of their cosy cartelized agreement was
to refrain from paying any interest on their current account deposits,
and only low agreed rates on their deposit accounts (or 'time deposits').
Management of deposit liabilities was therefore passive, and all the
emphasis was on how best to manage their assets so as to achieve an
acceptable level of profit - cushioned by the cartel and partially hidden
from public gaze by accounting privileges — in the long run. This long
run ended with the rise of the secondary and foreign banks in the 1960s,
when appropriately the old theory was displaced by the craze for
'liability management'.
The practice and theory of liability management was first developed
in the USA with the expansion of the 'Federal Funds' market in the
1950s. It came to Britain with the American bank invasion during the
1960s and was therefore contemporaneous with the rise of the
Eurodollar and the parallel markets. The time was just ripe for eager
acceptance and further development of this transatlantic innovation.
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
423
Since the banks and quasi-banks could now borrow as much as they
wanted whenever they wanted from the parallel markets, a number of
micro- and macro-economic consequences followed. First, they could
sidestep the discipline associated with borrowing from the central
bank, whether directly, as in the USA, or indirectly, as in the UK via the
discount houses. Secondly, they needed no longer to keep nearly so
much as formerly in low-yielding liquid assets, for these could be
purchased with borrowed funds just as and when required. Thirdly, they
therefore could and did switch to holding a much higher proportion of
higher-yielding 'earning assets' such as loans and advances. Fourthly,
since a range of longer-term deposits could also be bought, banks could
grant a higher proportion of longer-term loans (or, which apparently
came almost to the same thing, they could more willingly 'roll over'
short- and medium-term loans). These again were usually more
profitable for the banks than being confined to short loans, and much
more profitable than the traditional overdraft. Fifthly, banks needed no
longer to wait to see whether they had sufficient funds before they
agreed to make a loan (or at least they needed to be much less hesitant)
because they felt confident, backed by their growing experience in
'matching' or 'marrying' loans to deposits, that they could always get
the kind of funds they required, in the time periods and currencies as
necessary. The City became a happy hunting ground for innovative
schemes of liability management. All these developments worked
together to hold out the promise, given skilled liability management, of
achieving permanently more profitable and dynamic banking than that
typified under the old asset-management regime. The road to crisis was
paved with golden intentions. Only as a result of that crisis was the
popularity of the liability management theory replaced by the more
cautious 'weighted capital adequacy' approach. Before examining this
latest theory we must therefore look first to see how the shock
administered to the British banking system in this period led to a re-
examination of basic principles.
An invaluable account of the crisis is given by Margaret Reid (1982).
The earliest direct indication of impending disaster occurred in the
spring of 1973 when the Banking Department of the Scottish
Cooperative Wholesale Society, which had grossly overextended its
operations in Certificates of Deposit, had to be rescued by the Scottish
and London clearers, under the guidance of the Bank of England - a
harbinger of things to come. By December 1973, with the public
knowledge of the harsh difficulties facing London and County
Securities Group and of Cedar Holdings in particular, it had become
obvious that a major crisis, worse than any in Britain since 1890, was
424
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
threatening the banking system as a whole with collapse. To meet the
danger, a rescue committee under Sir Jasper Hollom of the Bank of
England, with George Blunden as his deputy, and with senior
representatives from all the major clearers, went into vigorous action as
from 29 December 1973: the famous 'Lifeboat' was launched. As Sir
George Blunden later explained, at a speech at Cardiff Business Club on
25 October 1976
Though these secondary banks had not previously been under the
surveillance of the Bank of England, it was to the Bank that London and
County turned when faced with crisis. And it was obvious to the Bank that
it had to marshal defences against what might otherwise become a tidal
wave sweeping through, and probably overwhelming the financial system.
About thirty secondary banks were supported directly by the
'lifeboat', and at least another thirty such banks received other forms of
assistance. 'Without these supporting operations virtually all of them
would have collapsed . . . and undoubtedly many of the primary banks
would have been swept away in the maelstrom. As it was, by protecting
the secondary banks, the Bank of England and the clearing banks
ensured that not one of the inner ring of primary banks had to be
supported' (Blunden 1976). Even so, at the height of the panic the false
rumour that National Westminster needed such support had to be
denied both by its Chairman and by the Governor of the Bank.
The 'Lifeboat' operation was an outstanding triumph for the Bank.
Not a single ordinary depositor lost a penny, while most of the suspect
banks were successfully restructured or absorbed by stronger banks.
But the fact remained that widespread disaster had been very narrowly
avoided. This alerted everybody to the urgent need for comprehensive
and drastic reforms in the ways in which banking was carried on and
how it was (or was not) supervised. Bankers' attitudes recoiled from
aggressive liability management in favour of safer banking. It was clear
that every bank should make sure that its capital base was strong
enough in relation not only to the total amount of business it took on
its books, but also that its free capital base should be used as a yardstick
to provide a strict limit to the special risks associated with particular
types of activity e.g. foreign currency exposure in an era of floating
rates, or lending to property development companies - two of the main
causes of failure in the mid-1970s. General agreement was reached
between the Bank and the City, after years of discussion culminating as
we shall see in legislation, chiefly but not only in the Bank Acts of 1979
and 1987, on the operation of the new system which was being first
developed step by step on a voluntary basis. Among important specific
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
425
provisions were that no bank should make a single (or aggregated to
connected companies) loan of 25 per cent or more of its free capital
base without having first to obtain the permission of the Bank of
England, while all loans of from 10 per cent up to 25 per cent of a
bank's capital had to be specifically disclosed to the Bank on a regular
and timely basis. In other words, all banks had to embrace the
'weighted capital adequacy' theory, with liabilities of greater risk
requiring proportionately greater capital backing, as an unavoidable
guide to their operations. Although the Bank's prestige throughout the
banking world was greatly heightened by the way it successfully 'saved
the City' in the mid-1970s, it was obvious that in its task of helping to
build up and maintain a sound banking system, now that this system
was far more extensive than ever before, it would require to have its
traditional authority very considerably strengthened. What was
required was something quite new in British banking history: a written
financial constitution.
Supervising the financial system
A basic reform in the theory and practice of financial supervision in
Britain following the secondary banking crisis concerned the definition
of a 'bank'. For nearly one hundred years banking students had both
laughed at and admired the circularity and the foggy imprecision of the
accepted definition in the Bills of Exchange Act 1882 which said that
'bankers' were simply those people 'who carry on the business of
banking'. However the law's laxity and its very vagueness kept the door
wide open in Britain for new entrants and new experiments. It was
through this door that hundreds of secondary 'banks', armed with new
tools, surged aggressively in the run-up to the crisis. When the legal
status of United Dominions Trust, the largest of the secondary banks,
was challenged in 1966 by a Mr Kirkwood, a bankrupt owner of a
garage business, the resulting important legal case led the judges, with a
bare majority of two to one, to agree first that UDT could for all
practical purposes rightly be considered to be a bank, and secondly to
advise each aspiring bank, in order to remove any doubt, to seek a
certificate from the Board of Trade that it was 'bona fide carrying on
the business of banking'. This recommendation, rapidly entrenched as
section 123 of the Companies Act of 1967, became a potent factor in the
stimulation of secondary banking because it enabled such banks to
borrow (and therefore lend more competitively) at more favourable
rates than before. At a stroke, not only the legality but also the
competitive powers of a vast new army of aggressive bankers were
increased, thus putting an end to most of the remaining monopolistic
426
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
privileges of the traditional and hitherto complacent clearing bankers.
However although the Board/Department of Trade could grant a
licence, it had neither the power nor the ability to supervise. In the
crisis, as we have seen, the Bank of England was urgently left to take
over such responsibilities. Putting such a wide burden on sounder legal
foundations was one of the most pressing reasons for the Banking Act
1979, which came into full operation in a formal sense from 1 April
1980, but which had been gradually and informally approached in
practice by the City during the previous five years - during which all the
main participants co-operated in the knowledge that legislative powers
were certain to follow. The objects of the Act were 'to regulate the
acceptance of deposits, to confer functions on the Bank of England
with respect to deposit-taking institutions' and 'to restrict the use of
names and descriptions associated with banks and banking'.
The 1979 Act, with all-party support, used the popular cause of
consumer protection to bring some degree of order and control over a
previously amorphous banking system of some 600 institutions. It set
up a two-tier arrangement that divided the banking sheep from the
deposit-taking goats, giving to the Bank of England (not the Treasury
or the Department of Trade and Industry) the power to decide,
according to certain criteria, whether an institution could be regarded
as a 'recognized bank', and so be allowed to use the terms 'bank' and
'banking' in its title, stationery and advertising, or whether it was just a
'licensed deposit-taker' (LDT), and so could not call itself or advertise
as a 'bank'. The minimum criteria for being a recognized bank,
stipulating both quantitative and qualitative ingredients, included
having 'enjoyed for a considerable period of time a high reputation and
standing in the financial community' and the provision of either 'a wide
range of banking services' (in which case a minimum of £500,000 of net
assets was required), or 'a highly specialised banking service' - a device
to let the discount houses into the top tier to which they undoubtedly
belonged — in which latter case the lower minimum of £250,000 of net
assets was required. Net assets were defined as 'paid up capital and
reserves'. The minimum criteria for being accepted as a licensed
deposit-taker included also 'net assets of a minimum of £250,000' plus
the qualitative stipulation that 'every person who is a director,
controller or manager is a fit and proper person to hold that position'.
The second part of the Act was concerned with the setting up and
regulation of a Deposit Protection Board and Fund, administered by the
Bank of England, to which all banks and LDTs had to contribute 0.3
per cent of their total deposits, between a minimum contribution of
£2,500 and a maximum of £300,000. This Protection Fund would
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
427
guarantee repayment of all individual deposits - but significantly only
up to 75 per cent of the total, again subject to a ceiling of £10,000. The
25 per cent residual and the ceiling acted as cautionary warnings to
depositors and banks - emphasized by the widespread failure of
'Thrifts' in the USA. As it turned out, the numbers of recognized banks
and of LDTs were evenly balanced, at 295 each in 1983, and with 290
banks and 315 LDTs in the peak year for numbers in 1985, when of the
total of 605 institutions 250 were overseas institutions with UK
branches, 65 were subsidiaries of overseas institutions and 24 were joint
ventures of mixed parentage. Perhaps the most important feature of the
Act was the power granted to the Bank of England for the first time in
law, to call for statistical and other information as required by the Bank
from every licensed institution, including 'its plans for future
development' (clause 16). The legislation had teeth, for the Bank could
(and did) revoke licences where it felt necessary. Experience with the
working of the Act in the first five years seemed on the whole to be
satisfactory, but there were a few groans. A minor irritant was the
feeling by the big banks that they were contributing the most to a fund
to protect depositors from smaller and more risk-prone banks which
paid much less. (They were already seeming to forget one of the main
lessons of the mid-1970s crisis, that the failure of even the smallest
secondary banks brought general discredit and loss of confidence
throughout the City - penalties worth paying to insure themselves
against.) Of more substance was the complaint by indigenous LDTs
that overseas LDTs as well as banks could use the terms 'bank' and
'banking' in circumstances denied to native institutions. This led to a
number of 'David and Goliath' type struggles as, for example, between
the (Commercial) Bank of Wales and the Bank of England, with the
little protagonist maintaining its title.
Most serious of all was the failure of a recognized bank, not on or of
the fringe but right in the centre of the City. In the late summer of 1984
Johnson Matthey Bankers Ltd, which had close connections with the
Bank of England, failed and had to be directly rescued by the Bank of
England, much to its embarrassment and much to the annoyance of the
Chancellor of the Exchequer. This failure brought right home to the
City the need for still stronger supervisory powers, particularly with
regard to the ways in which the banks' accountants and auditors were
involved in the supervisory process. Consequently the Chancellor of the
Exchequer, Nigel Lawson, announced in December 1984 the setting up
of yet another committee, under the chairmanship of the Governor,
Robin Leigh-Pemberton, to consider amendments required to be made
to the Banking Act. The resulting Bank Act 1987 abolished the two-tier
428
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
division of recognized banks and LDTs, which were all henceforth
known as 'authorized institutions'; it laid down a uniform net assets
requirement of £1,000,000; it increased the ceiling for individual
protected deposits from £10,000 to £20,000; it gave a legal basis for a
Board of Banking Supervision; it gave the Bank discretion to decide
whether authorized institutions need set up audit committees and have
non-executive directors (to which the answer was 'yes' unless the bank
was a very small one); it considerably strengthened the requirements for
banks to maintain adequate records and strictly audited systems of
control; and it allowed any authorized institution, provided it had a
minimum capital of £5,000,000, to use the name and description
'bank'. Forty-six institutions immediately rushed to take advantage of
this last provision, proof that a bank by any other name does not rank
so highly. The growth in the number of staff employed in the Bank of
England's Supervision Division, from 75 in 1983 to 200 in 1989 and to
270 in 1993, gives another pointer to the increasing importance of
supervision; although, to keep it in perspective, the Bank's total staff
during this period numbered around 5,400.
In the twenty years following 1971 the Bank shed all vestiges of its
former traditional image as an aloof, taciturn and reticent Old Lady. The
Bank's staff have poured out a stream of consultative papers, and by
these and other means have carefully prepared its policies only after the
most detailed discussions with interested financial institutions and
individuals, in order to try to make sure that when its proposals are
finally crystallized into law and practice, they are tried, tested and
workable, and that they help to maintain an essential degree of co-
operative goodwill between the central bank and the financial
community at large, both indigenous and that from overseas. 'In
particular it has been a major policy initiative of the Bank to enlist the
assistance of the accountancy profession in the process of bank
supervision' (Annual Report, Bank of England, 1987, 29). Under the
terms of the Bank Act every authorized institution has via an approved
accountant to submit an annual report on internal control systems and
records, make regular prudential reports and submit to being the subject
of ad hoc reports as and when felt necessary by the auditors. Apart from
these reports the Bank keeps itself closely informed of the situation in
each of its 600 reporting institutions by means of direct interviews and
visits. Over 3,000 such interviews were carried out during 1988, an
average of six per bank, as well as 126 review team visits, some lasting
over a week, in order to provide more detailed knowledge of the
management, control systems and procedures of the bank concerned.
Supervision had thus become comprehensive and continuous. In
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
429
addition the Bank has been involved in the preparation, among many
other matters, of the Consumer Credit Act of 1974, the Financial
Services Act of 1986 and the Building Societies Act of the same year, the
'Report on Banking Services: Law and Practice' - the Jack Report of
1989 (Cm 622 February 1989) - and the government's White Paper
'Banking Services; Law and Practice' (Cm 1026 of March 1990), from
which like-thinking parentage a voluntary Code of Banking Practice was
to emerge. Internationally the Bank was involved in discussions with the
Federal Reserve System of the USA and with the Bank for International
Settlements on the 'convergence of capital' and with the other members
of the European Community on the European Directives on Banking
and Credit Services and the Delors Report on 'Economic and Monetary
Union in the European Community' (1989), of which committee
Governor Leigh-Pemberton was a member and signatory. Perhaps it is
not surprising that a former economic adviser of the Bank, Professor
Charles Goodhart, has complained of 'overkill'; and one begins to
wonder how soon experience may show that the law of diminishing
returns applies even to banking rules and regulations.
Although the basic causes of the British secondary banking crisis
were very much internally generated, it was accompanied, and to some
extent aggravated, by financial failures in the USA and in continental
Europe. Failures of scores of small US banks from among its then
15,000 total are not unusual, (see table 9.4). Yet the failure of larger
banks such as the National Bank of San Diego in 1973, of Franklin
National in 1974 (and even more of the near-failure of the giant
Continental Illinois in 1982) strengthened the general concern among
the international financial community for stronger and wider-reaching
forms of banking supervision. In 1974 Lloyds Bank branch in Locarno
suffered severe losses, because of poor supervision, on its foreign
exchange operations, as did Westdeutsche Landesbank and the Union
Bank of Switzerland. However it was the sudden collapse of the West
German Bankhaus I.D Herstatt on 26 June 1974 which precipitated an
international crisis and led to the temporary paralysis of the Eurodollar
market. Widespread failure was avoided by the prompt co-operative
action of the monetary authorities, again led by Governor Richardson,
who quickly organized an international version of the 'lifeboat'. Such
crises provided the spur to a long series of contemporary and partially
linked discussions, nationally and internationally, on how best to avoid
such difficulties while yet preserving full and equal competition, with
the suitably chastened participants being far more amenable to realistic
compromise than would otherwise have been the case.
In July 1988 the Governors of the ten major central banks meeting in
430
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
Basle agreed to implement a series of proposals based firmly in fact
(though without mentioning the word 'theory') on the capital adequacy
theory. Banks in all member countries were to converge to a minimum
capital base of 8 per cent of assets. (In Britain the actual base was
already in general considerably higher.) The 8 per cent capital base had
to consist of at least 4 per cent paid-up capital or its equivalent for 'Tier
V capital, plus 4 per cent reserves and general provisions for losses for
'Tier 2'. As well as an agreed definition of capital, the risk-weights to be
attached to a bank's assets were also agreed, ranging from a nil risk for
cash, bullion and certain loans to OECD governments, through a 10 per
cent weight on loans to the discount market and on Treasury and other
eligible bills, and a 50 per cent weight risk on residential mortgages, up
to a 100 per cent weight risk on loans for most other purposes to private
and corporate customers. (Bank of England: 'Implementation of the
Basle Convergence Agreement', October 1988.) Any complacency
regarding the adequacy of these measures was blown away when the
Bank of England was forced to close the British branches of the Bank of
Credit and Commerce International on 1 July 1991, so exposing the
world's biggest banking fraud and eventually bringing about a much-
needed strengthening of supervisory co-operation between home and
host monetary authorities (see Sir Thomas Bingham's 'Inquiry Into the
Supervision of BCCF 22 October 1992). Global money and global
vulnerability had thus produced a large measure of international
agreement on both the framework and much of the method of bank
supervision.
Accompanying the supervisory regime to hold the banks in check
there arose a whole host of rules and regulations under the umbrella
Financial Services Act of 1986, administered mainly by self-regulatory
organizations but backed up by statutory sanctions, covering
investment, insurance and the stock exchanges. Similarly the Building
Society Act of 1986 attempted both to give the societies greater freedom
to carry out a much wider range of financial transactions than ever
before while also tightening capital and other controls under the
watchful eye of a Building Societies Commission. Because bank loans,
securities and building society loans compete over a growing part of
their range it had become inevitable that the pendulum of freedom
followed by control should eventually apply more or less at the same
time across the whole of the financial spectrum. The first of the
building societies to take advantage of the provisions in the new Act
enabling them to change at the same time into a public limited
company (from a mutual organization) and into becoming a fully
authorized bank, was Abbey National, the second largest society in
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
431
1989. Legally speaking, the barrier between bank and building society
had by the mid-1980s become paper thin and easily passable by the
bigger societies. By mid-2001 the Halifax, the largest society, plus nine
other large ones, had become public limited companies and the 287
mutual societies of 1980 had dwindled to 67. 3 Economically speaking,
the dividing line had for many years been non-existent, as was most
obviously seen during the long-drawn out attempts to define the money
supply and especially the increasingly important concept of 'broad
money'. These were essential steps in the never-ending struggle to
control whatever was thought to be the actual money supply as a key
factor in controlling the economy.
Prudential supervision, triggered off, as we have seen, by concern for
the safety of customers' bank deposits, thus became inextricably
interwoven with the fundamental macro-economic struggle of the last
quarter of the twentieth century, namely how to control the economy
by controlling (if possible) the money supply. Thus the main indicator
of the government's economic success, or lack of it, was the rate of
inflation. In the words of Nigel Lawson, Chancellor of the Exchequer
from 1983 to 1989, inflation was to be both judge and jury of the
government's efforts. Ironically, Lawson, who (with Sir Geoffrey Howe)
was the chief architect of the Thatcher government's 'Medium-Term
Financial Strategy', himself became the first major casualty of the
government's painfully slow progress in containing inflation.
Thatcher and the medium-term financial strategy
The term 'monetarism' was coined by Professor Karl Brunner (1916-89)
as a convenient label for the counter-revolution against the Keynesian
economics that had dominated theory and policy in many countries,
but especially Britain, for much of the three or four decades after 1936.
This counter-revolution was triggered by Milton Friedman's famous
Restatement of the Quantity Theory as early as 1956, and thanks to
Brunner, made quicker progress in Switzerland and West Germany,
countries of markedly low inflation, than in the USA or Britain, where
Democratic and Labour Party politicians were much more loath to
depart from what had now become orthodox and embedded Keynesian
opinion. It is therefore of the greatest significance that the signal
rejection of Keynesian policies was made by a British socialist Prime
Minister, James Callaghan, in 1976 after inflation had been running at
3 Millions of new shareholders resulted from the demutualization of these formerly
typical working-class institutions. Having helped to create a property-owning
democracy they were now sowing the seeds of a shareholding one. In 2001, Halifax
joined Bank of Scotland to form HBOS, following the Royal Bank of Scotland's
takeover of NatWest: 'bigger seemed better.'
432
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
over 25 per cent and when recourse had ignominiously to be made to
the IMF to support sterling. In a bold, unequivocal, speech (written
after consulting with his eminent economist son-in-law, Peter Jay) made
to the Labour Party Conference in Blackpool on 28 September 1976, at
the height of a financial crisis, Lord Callaghan dramatically challenged
the cosy conventional Keynesian viewpoint:
We used to think that you could spend your way out of a recession and in-
crease employment by cutting taxes and boosting Government spending. I tell
you in all candour that that option no longer exists, and that insofar as it ever
did exist, it only worked on each occasion since the war by injecting a bigger
dose of inflation into the economy, followed by a higher level of unemploy-
ment as the next step. Higher inflation followed by higher unemployment.
We have just escaped from the highest rate of inflation this country has
known; we have not yet escaped from its consequences: higher unemploy-
ment. That is the history of the last twenty years. (Callaghan 1987, 426).
The Governor of the Bank of England confirmed ten years later that
Britain's conversion to monetarism occurred under a socialist admin-
istration in 1976: 'The foundations of our present monetary policy were
in fact laid down in 1976' {BEQB December 1986, 499). Furthermore,
although statistics for narrow, medium and broad money had been
published by the Bank from September 1970 it was not until 1976 that
an explicit target for the growth of the money supply was first
announced publicly. The apparatus of a new monetary policy was in
place - but it required the iron will of Margaret Thatcher to bring in a
full-bodied monetarist policy when she became Prime Minister in May
1979 including the abolition of exchange controls.4
In its first budget of 1980 the new Conservative administration
announced its Medium-Term Financial Strategy (MTFS), setting out the
broad fiscal and monetary policy for the next four years, with a much
greater and explicit emphasis on the medium term than had customarily
been the case. There was to be a targeted progressive decline in monetary
growth with the stated ultimate aim of stable prices. Fiscal policy was to
support monetary policy, which latter was unequivocally to hold pride of
place. Thatcherite policy thus suddenly caught up with that branch of
monetarism that embraced what is known as the 'Rational Expectations
Hypothesis' (REH), which correctly but overoptimistically lays great
stress on the role of the public's expectations in the inflationary process.
'The new challenge to Keynesian policies . . . not only argued that
Keynesian theory cannot handle inflation, but also that Keynesian
4 This probably had as big an influence in restoring UK's international competitive-
ness as the new laws to reduce the overgrown powers of the trade unions.
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
433
policies are themselves the cause of inflation; only by discarding
Keynesian policies will we be able to control inflation. This influential
challenge is made in the name of "rational expectations'" (Colander
1979, 198). (Incidentally when Professor Colander wrote that, he was
Visiting Scholar at Nuffield College Oxford, long thought to be the last
bastion of unrepentant Keynesianism.) Only if the government held to its
declared course, come hell or high water, could its credibility be assured
and hence the public's expectations of future inflation be moderated - a
prerequisite for actually reducing inflation.
There was thus to be no room for Keynesian demand management
through a flexible fiscal policy, even with rising unemployment, nor for
monetary 'fine-tuning'. Instead an attempt was made to set the path
along a more fixed anti-inflationary timetable with annual reductions
in the Public Sector Borrowing Requirement (PSBR) (which had
previously swollen to such an extent as to generate excess liquidity and
crowd out private sector investment) coupled with pre-announced
target ranges for what was considered from time to time to be the most
relevant form of the money supply. Thus a target of 7 per cent to 11 per
cent for 'Sterling M3', the currently favoured definition, was announced
to cover the period from February 1980 to April 1981. The actual rate of
growth turned out to be 18.5 per cent: such overshooting became
common throughout the 1980s. Nevertheless, because of the ruthless
force of other anti-inflationary measures, the rate of inflation fell until
the late 1980s when, for a number of specific reasons, it picked up
again. The anti-monetarists could claim that their repeatedly stated
view (e.g. see Kaldor 1970) that there was no close correlation between
the money supply and the rate of inflation was thereby proven; in
contrast the monetarists could - until 1987 - claim, that despite the
unfortunate slippage of the money supply brake, their general policy of
bearing down on inflation was working. In any case there was a heavy
cost to pay in the form of the minimum lending rate raised to 17 per
cent in 1979, and of a trebling of unemployment from around one
million to three million in the three years from 1980 to 1983,
accompanied by a decimation of manufacturing industry which left the
industrial base so small as to be unable to satisfy home or export
demand in subsequent recoveries, so increasing Britain's high marginal
propensity to import and her chronic balance of payments deficits.
After ten years, with Britain's increased rate of growth at long last on
average exceeding that of its major competitors, and with unemployment
rising again, after having been brought back down to around one million,
coupled with inflation of over 10 per cent, the general verdict on the
Thatcherite experiment is a mixed one. It turned out to be highly
434
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
successful in some respects, e.g. in the continued progress of the City of
London and more widely in stimulating sounder management, stronger
personal incentives, less militant unionism and a higher rate of
productivity in industry, even though the average levels of productivity,
employment-training skills and the size of the manufacturing base
remain far too low. Strangely enough in what should have been the
decisive sector for monetarism, the rate of inflation, the success of the
mid-1980s, despite being purchased at so high a cost, appeared short-
lived. As stated above (pp. 395-97) the average rate of inflation during the
long period of Keynesianism from 1934 to 1976 (with the painful
exception of the mid-1970s when Britain seemed in danger of becoming
an ungovernable banana republic) was much lower than the inflationary
average of the explicitly and abrasively monetarist decade of the 1980s.
As the Governor admitted in the Bank of England's report for 1990: 'No
central banker could regard as successful a year in which the value of
money fell by as much as 8 per cent in terms of what it will purchase at
home, and by 10 per cent in terms of overseas currencies.'
Because the money supply is a leading indicator (prices following
with a variable lag but usually about eighteen months later) while
unemployment is usually a lagging indicator (employers being reluctant
to shed labour they have already trained and to incur redundancy costs)
the year 1990 saw prices and unemployment rising together, threatening
a return to the stagflation nightmare of the 1970s. A deflationary high
interest rate was contributing visibly to raise unemployment and yet
without any visible effect on inflation even after a year of base rate at 15
per cent. By 8 October 1990, when base rate was reduced to 14 per cent,
both unemployment and inflation were still rising and were
significantly higher than when Margaret Thatcher became Prime
Minister in 1979. Obviously monetarism, the essence of Thatcherism,
was not the simple infallible cure its more immoderate protagonists had
confidently trumpeted. It cannot be too emphatically stated that a
consistently firm and therefore credible monetary control is a necessary
but not (particularly in Britain) a sufficient cure for inflation, which has
mainly, but certainly not exclusively, monetary causes. Among the
reasons for the failure indelibly indicated by the rise in inflation to
double figures, after having fallen to 3 per cent, were first, the
government's (initially understandable) reaction to the stock market
crash of October 1987; secondly, the pernicious role of the distorted
housing market; thirdly, the government's mistaken persistence in a lax
tax policy; fourthly, the monetary authorities' confusing plethora of
money targets and indicators; and fifthly, the government's ambiguity
in deciding whether it should be the money supply, however measured,
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
435
or the exchange rate which should be the main determinant of policy.
Just as the London Clearing Banks' monopoly was eroded by the
revolutionary changes of the 1970s, so eventually was that of the
London Stock Exchange. In 1984, to forestall legislation expected to be
at least as restrictive as that of the Securities Exchange Commission of
the USA, agreement was reached between the stock exchange and the
Department of Trade and Industry which involved abolishing fixed
commissions and replacing the traditional single-capacity system of
separate jobbers and brokers with a combined dual-capacity system
which would be open to new competitors. These changes were made to
coincide with a new system of automated operations. Because these and
other improvements were all timed to begin together on 27 October
1986 (instead of being introduced bit by bit) the change was known as
'Big Bang'. The creation of this brave new competitive world was
assisted by and in turn further stimulated the booming bull market.
Average daily turnover of UK equities increased from £643 million in
the first nine months of 1986 to £1,156 million in the corresponding
period of 1987, an increase of 80 per cent - and if intra-market
transactions are included turnover increased by almost 250 per cent
{BEQB November 1987). The number of dealers (or 'equity market-
makers' as they became known) rose to thirty-four in that same period
compared with just thirteen jobbers before the Big Bang. The company
merger mania and the growth of 'securitization' (i.e. the process by
which corporate borrowers, instead of taking loans from their banks,
issued saleable securities) further increased the volume of trading on the
world's stock exchanges. This system reached its extreme form in the
'junk bonds' of Wall Street (i.e. the issuing of high-yield but therefore
high-risk bonds classified as 'speculative' by credit agencies such as
Moody and Standard-and-Poor). The speculative fever was further
stimulated by the growth of 'indexed' and other forms of 'programmed
trading' whereby computerized dealings in a whole range of securities
were automatically triggered at prearranged price levels.
Suddenly just one year after the Big Bang came the Great Crash, when
all this frenzied bullish activity went into reverse. It frightened monetary
authorities the world over into adopting what turned out to be, for
Britain especially, an excessively relaxed and expansionary monetary
policy, thereby rekindling the previously ebbing inflationary fires. The
downturn started on Wall Street on 6 October 1987, set off by fears that
equity prices were too high to be sustained and by rumours that the
existing international agreement to support exchange rates in general
and the dollar in particular (the Louvre agreement) was in imminent
danger of breaking down, this latter acute fear being built on the chronic
436
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
anxiety caused by the huge size of the US 'double deficit', viz. its budget
deficit and its balance of payments deficit. The fall on Wall Street
reached record levels on Friday 16 October. It so happened that, adding
woe to the general foreboding, a devastating hurricane that same even-
ing swept ominously across southern England including in its full
severity London and the stockbroker belt. Therefore New York's record
fall was not reflected in London until 'Black Monday', 19 October, when
what were certain to be record insurance claims added their weight to
the crisis. Hurricanes apart, the newly automated world markets reacted
with greater speed than ever before: and so also, to be fair, did the
curative actions of the world's monetary leaders. Alan Greenspan, head
of the Federal Reserve System, promised immediate help to the US
financial system; the Governors of the central banks of 'G7', the major
economies of the world (excluding USSR), jointly issued a similar
statement regarding the need for adequate liquidity and support for
exchange rates; and the Bank of England reduced base rates from 10 per
cent by 1li per cent on 23 October and again on 4 November, with the
downward trend continuing, falling to 7Vz per cent by May 1988.
At the time, these moves were universally and enthusiastically wel-
comed by politicians, bankers, industrialists and academics, whether
Keynesian or monetarist. Among the reasons for this unusual economic
unanimity were first the fact that the falls on the stock exchanges were by
far the worst since 1929, so generating a widespread fear that these falls
would, unless quickly and decisively checked, lead on, as in 1929 to 1934,
to a worldwide slump of devastating proportions. While no ink should be
needed to see why Keynesians would react immediately to welcome
almost any action which might prevent such a calamity, without worrying
too much about the opposite danger of feeding the still existing inflation,
the fact that monetarists also, despite their more sensitive fears regarding
inflation, similarly welcomed such actions does require some explana-
tion. The answer is to be found in no less an authority than Milton
Friedman himself, who with co-author Anna Schwartz had in 1963 made
a scathing attack which blamed the 'inept' Federal Reserve for having
turned the stock exchange crisis of 1929 into the modern world's worst
slump. They fully justified their criticism in a typically robust and plain-
speaking form which no one with any claim to monetarist leanings could
possibly afford to ignore. Because the Fed was so inept, 'the monetary
system collapsed but it clearly need not have' (1963, 407). Furthermore
the great contraction [in the money supply] shattered the long-held belief that
monetary policies were important . . . and opinion shifted almost to the
opposite extreme that 'money doesn't matter'. However, the failure of the FRS
to prevent the collapse reflected not the impotence of monetary policy . . . but
is in fact a tragic testimony to the importance of monetary forces (p.300).
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
437
Faced with the Great Crash of 1987 therefore all monetarists, from
the most full-blooded fanatics to the most diffident (if any) were united
in their determination to seize this opportunity to demonstrate to the
world the truth of their leader's gospel. Money could save the world
from slump. For far too long Thatcherite monetarism had seemed, at
least with regard to the money supply, to have been a negative doctrine,
preaching monetary restriction whatever the pain (and despite the cride
coeur of 364 economists, not all of them Keynesian, who in a letter to
The Times following Sir Geoffrey Howe's savage budget of March 1981,
rightly feared the decimation of British manufacturing industry). In
contrast to the gloom of the 364, monetarists like Professor Minford
had, with incredible optimism, predicted that any loss of output would
be 'temporary' and of 'modest significance' and that unemployment
would show merely a short-lived increase of around 300,000 — 'wrong
by a factor of four' (Gilmour, 1983, 143). Now in 1987 the monetarists
could demonstrate in a directly benevolent and positive manner that the
most powerful weapon in any government's economic armoury was the
monetary lever. Monetarists like Chancellor Lawson were determined
not to repeat the mistakes of the 1930s and so turned a blind eye when
the money supply rose well above its target limits, with the later
inevitable result that the rate of inflation rose strongly again, to reach
11 per cent by autumn 1990 — by which time a new Chancellor, John
Major, had been installed. What still remains to be explained is why
Britain's inflation rose more strongly and then declined much later than
was the case with its main competitors. Strong contributory factors
flow from the built-in market distortions in the British economy, such as
the cost-push of annual wage rises (already noted) and in particular the
distortions in the housing finance market (see Muellbauer 1990).
Contrary to expectations and thanks only in part to the prompt
curative actions of the world's monetary authorities, the Great Crash
did not lead immediately to a general, severe slump: the world's major
economies were much stronger than in the 1930s. In the UK one special
result of the equity slump was to divert personal savings from unit
trusts, stocks and shares and privatized projects like a badly timed BP
issue, increasingly into the already buoyant housing market, so
contributing to a housing boom of record dimensions. 'The housing
market thus became the main engine of the current burst of inflation
which reached 10.9 per cent in September 1990' (Riley 1990). In boom
conditions houses, which are normally stolidly fixed assets, became to a
considerable degree liquid, spendable assets, or assets on which liquid
funds could readily be raised. The euphoric 'wealth-effect' of asset
inflation stimulated both monetary demand and supply, since not only
438
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
did spenders and borrowers so blessed feel confidently richer but
lenders also felt more able and ready to lend on the security of the rising
value of property and the greater personal wealth of the borrower.
Although the principle of the 'wealth-effect' (which works both ways)
has been known to economists for many generations, and was for
example emphasized by the pre-1914 Cambridge School under the
name of the 'Pigou effect', never has the principle been so widely and
clearly demonstrated as in the latter half of the 1980s. Since around
fifteen million, or two-thirds, of the UK's dwellings were owner-
occupied, with an aggregate value of around £1,000 billion, the total
effect of a rising housing market on general expenditure, and therefore
on inflation, became of considerable weight, particularly since the UK
has a higher percentage of home ownership than most of its major
competitors.
A flood of finance stimulated the housing boom (see Chrystal 1992).
This still came mostly from the building societies, but with the banks
now free to add much more than previously to the total sum. In the four
years after 1984 the societies doubled their annual mortgage lending,
with the largest increase ever made in the house-buying mania of 1988.
Given this record expansion, the societies could then face with
equanimity the growing competition of the banks. Loans made by the
larger banks for house purchase trebled between 1984 and 1989, rising
from £14.4 billion to £43.1 billion (Bank of England Report for
1989/90). Regardless of the original source or stated purpose of the
loan, much of this huge flood found its way into general expenditure.
This process of turning the inflated value of housing into consumer
expenditure or into the repayment of short-term (and dearer) debt, a
process known as 'equity withdrawal', soared to record heights
reflecting the 'increasing sophistication of the personal borrower and
the blurring of the distinction between mortgage and non-mortgage
finance' and of course of the distinction between banks and building
societies (Bank of England Report for 1989/90). The money supply tap
was turned on full.
Not only were there too many institutions eagerly supplying too
much credit, but also they were doing so at heavily subsidized rates of
interest, since tax relief on mortgage interest was granted at the
borrower's marginal, i.e. highest rate, up to the current limit of £30,000.
Between the late 1970s and the mid-1980s the tax relief per mortgagor
in real terms rose by 50 per cent. Yet in the March 1988 budget Nigel
Lawson reaffirmed the government's commitment to the principle of
mortgage interest relief, which was enjoyed by 8.4 million borrowers,
including 500,000 single persons with joint or multiple mortgages.
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
439
The multiple mortgage, an inequitable and costly tax on legitimacy,
was ended on 1 August 1988. In the mean time this otherwise welcome
and overdue reform led to a stampede for joint and multiple mortgages
before the deadline, creating a paradise for estate agents and a further
sharp spur to inflation. Each downward step in interest rates (with base
rates as we have seen down to 7'A per cent by May 1988) coupled with
the budget's generous reductions in the rates of income tax, increased
the euphoria and the scope for higher mortgages and equity
withdrawal. Furthermore as well as thus stimulating powerful surges of
demand-pull inflation, the cost of mortgage repayments formed a
significant element in the cost-push pressures of wage bargaining,
particularly as such payments rose progressively when in its belated and
narrow-visioned response to inflation the government pushed base rates
upwards to reach 15 per cent by 5 October 1989. A powerful polemic on
this matter is given by the Oxford economist, Dr John Muellbauer, in
his study of The Great British Housing Disaster and Economic Policy
(1990). Just as mortgage finance, partly through 'equity withdrawal',
spurred on the boom of 1988 to mid-1990 so thereafter as house prices
fell below mortgage indebtedness, 'negative equity' helped to intensify
and prolong the slump of the following three years.
The next two interrelated causes of Britain's differentially high and
stubborn inflation, namely the confusing array of ever-changing
monetary definitions, targets and indicators, and the vacillation with
regard to the precise role of the exchange rate, lie at the heart of any
evaluation of Britain's monetarist experiment. Although the quantity
theory is the world's oldest explanation of the relationship between
money and prices and was known to the ancient Greeks and has had a
continuous existence in Europe since the sixteenth century, yet official
statistics categorizing the money supply into narrow, medium or broad
bands were not published in the UK until 1970, while official 'targets'
date from as recently as 1976 - a further reason for choosing this latter
year as the watershed between a Keynesian and a monetarist Britain.
Since then there have been about as many changes in the definitions of
money as there have been in the official definitions of unemployment,
in both cases well over a score, reflecting adaptation to changing
institutional and social practices coupled with political expediency.
Already by 1982 the Bank of England had grown tired of pointing out
that 'there is no single correct definition of money' and went on to
analyse no less than 'twenty-four classes of assets, some of which are
included in the aggregates and some not' {BEQB December 1982). Since
then many more have emerged. The selection of aggregates reflected not
only changing functions and institutions but also the varying exigencies
440
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
of political pressures, informed or confused by changing economic
theories. These monetary aggregates have included: MO, Ml, NIB Ml,
M2, M3, M3C, Stg.M3, M4, M4C, M5, PSL1, PSL2, DCE, etc. The list
is illustrative, not exhaustive, and the coverage has changed as, for
example, hire purchase companies became banks or as a building
society, such as Abbey National, the second largest, likewise became a
bank; as the proportion of interest-bearing deposits rose significantly;
and as the value of foreign as compared with sterling deposits changed
in importance. These developments may be seen as modern
elaborations of Keynes's original, simple but inspired dual classification
in which the total money supply is 'the amount of cash held to satisfy
the transactions and precautionary motives, Ml, and the amount held
to satisfy the speculative motive, M2 . . . Thus M = Ml plus M2'
(Keynes 1936, 199). In the mid-1990s the argument still raged, after
twenty years of inconclusive experimentation, relating fundamentally
to whether narrow or broad money, or some weighted combination of
them, made the best target.
In practice, money breaks down all artificial barriers; which explains
how 'savings' from housing rushed into spending, and why the
intermediate monetary categories get pulled and pushed from both
sides, becoming unstable and unreliable over time, just as happened to
the former officially favoured target 'Sterling M3'. Targets may be
secret or publicly announced; they may be points or ranges. Insofar as
monetary policy requires firm public expectations, a target must be
publicly announced, and preferably hit; while the flexibility obviously
allowed by a range gives the authorities a much greater chance of
claiming success than when faced with the over-precise imperative of a
stark point. Only aggregates which have demonstrably acted as good
measures of, or good pointers to, inflationary pressures should be
chosen as targets. Unfortunately 'Goodhart's Law' has often intervened
to undermine the reliability of indicators promoted into targets.
Professor Goodhart, when economic adviser at the Bank of England,
very wisely (though at first jocularly) commented that 'any observed
statistical regularity will tend to collapse once pressure is placed upon it
for control purposes'. This scepticism was thus not confined to anti-
monetarist outsiders. By the mid-1980s it had infected the highest ranks
inside the monetary authorities. Thus Governor Leigh-Pemberton
himself publicly wondered whether 'the unpredictability of the
relationship between money and nominal incomes could reach a point -
as in some other countries - at which we would do better to dispense
with monetary targetry altogether . . . and whether that point has
arrived in relation to broad money' (BEQB, December 1986). Broad
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
441
money ceased therefore to be a target at the beginning of the next
financial year. The fractious baby had been thrown out with the bath
water; and this was at the very time when the Lawson boom, fuelled by
record equity withdrawal, was being frantically signalled by the newly
discarded and discredited broad money target. There remained as a
target only MO, or narrow money (although to confuse the uninitiated
this is always termed officially in the Bank's statistics 'the wide money
base').
Little wonder that public credibility, a vital feature in inflationary
expectations, had evaporated. Sir Ian Gilmour, one of Mrs Thatcher's
many ex-ministers, captured the public's sceptical mood perfectly when
he wrote: 'Monetarism may be termed the uncontrollable in pursuit of
the indefinable' (1983, 142). Though difficult to interpret, the plethora
of monetary statistics stood in contrast to a fall in the quantity and
quality of general economic statistics - a costly parsimony. The
Governor of the Bank was thus fully justified in protesting that 'policy
mistakes and forecasting errors' were in part the result of the
'misleading information provided by official statistics' (BEQB, May
1990). This statistical fog not only caused both the Governor and the
Chancellor to underestimate the strength of the combined consumer
and investment boom, consequently overstimulated by their reductions
in interest and income tax rates, but also helped to excuse their delay in
taking the necessary remedial actions.
There had thus been three stages in monetary targetry since its
introduction in 1976: first the emphasis was on broad money, mostly
Sterling M3; secondly in the mid-1980s equal weight was also given to
narrow money, mostly MO; and finally from 1987 MO remained the only
target until 8 October 1992 when for the first time the rate of inflation
itself (within a range of 1—4 per cent) became the officially declared
target. Without becoming trapped in the maze of definitions, it is
essential to note briefly how, belatedly, building society and other
similar savings deposits, which have been responsible for releasing so
much of the inflationary potential of recent decades, came to be
incorporated into the monetary aggregates. The relevant figures first
appeared - as an 'experiment' - in the Bank's Bulletin of September
1979, as 'Private Sector Liquidity'; and after a continued existence in
slightly differing guises, still form an important and essential ingredient
in M4, the main broad money aggregate for policy purposes. Like
Russian dolls, the broader aggregates enclose the lesser, but with
surprisingly differing shapes. Faith in MO at first resided in the
simplistic theory that changes in its shape would bring about
corresponding changes in the broader categories, or (to change the
442
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
metaphor) that the whole broad inverted pyramid of money and credit
not only rested on, but was also controlled by, the money base, whether
MO or by some similar or even narrower measure, the size of which
could be directly determined by the Bank of England. In countries
without bank-like building societies and where the reserves kept by the
commercial banks in their central banks are substantial, such devices
work reasonably well; but unfortunately for 'little MO' and its
worshippers that situation no longer applies to the UK.
In June 1990 the narrow aggregate MO, which consists of notes and
coin in circulation (comprising over 99 per cent of the total) and
bankers' operational balances at the Bank of England (which comprise
less than 1 per cent) came in all to only £18 billion, equivalent to £320
per head of population or under two weeks' national income, a
proportion which has been tending to fall over recent years. In contrast
the stock of M4, which comprises the private sector's holdings of cash
plus sterling deposits at banks and building societies, came to £455
billion or almost £8,000 per head, and equal to about ten months'
national income, a proportion which has tended to rise with national
wealth over recent years (BEQB August 1990). It appears increasingly
unlikely that, in British circumstances, M0 even when hit, will control
the massive M4, but it may well reflect changes in inflationary
pressures. The big advantage of M0 is that it is used practically entirely
for transactions to be made now or in the very near future, so that it is
the best quick indicator of expenditures and of changes in the rate of
expenditure. It is a very good coincident or concurrent economic
indicator, but not nearly as good a predictor of future spending as many
monetarists had claimed. It tells us where we are and where we have just
been, but not where we are going: and it tells us nothing about cheques
or plastic money, M4, which is a changing mixture of moneys kept for
actual and anticipated expenditure as well as for saving, and does at
least indicate potential inflationary pressures up to one or two years
ahead, although not in anything like a mechanistic manner.
After fifteen years of targetry, neither the Bank nor the Treasury,
which though wounded, are surely best placed to make a judgement,
seemed at all confident with regard to which aggregates (if any) to
target. Unfortunately, to paraphrase Yeats, the best lack all conviction,
while the rest are full of passionate intensity backed up by models of
economic certainty. Official scepticism towards targetry has allowed
some monetarists to argue (against all other evidence) not so much that
monetarism has failed but that it has not been properly carried out. In a
letter to The Times (28 September 1990) a self-appointed Shadow
Monetary Policy Group of ten influential monetarists, including Tim
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
443
Congdon, Patrick Minford, Gordon Pepper and Sir Alan Walters wrote
that
it is right and timely to emphasise the strong need for a coherent and
credible domestic monetary policy . . . Given the complexities of the
modern deregulated financial environment it would be appropriate to
monitor and probably target a spectrum of monetary aggregates including
both the narrow (MO) transactions measure currently targeted and broader
measures of money and credit.5
In the light of the dire limitations of the UK's internal monetary
indicators and targets, Nigel Lawson very understandably decided to
make use of the exchange rate, long deferred to as an additional
indicator, in the form of 'shadowing the D-mark', to act as a brake on
UK inflation. No money can serve two masters, the internal money
supply and the external exchange rate; nor can the economy be expected
to give credence to the two diametrically opposed views seen to be
struggling for mastery in the Cabinet of the late 1980s, namely that of the
official Chancellor and that of Mrs Thatcher's private economic adviser,
Sir Alan Walters, who advocated freely floating exchange rates and
single-minded concentration on internal control of the money supply.
The City and then the country became aware of these incompatibilities,
and as the crisis intensified the Bank of England forced base rates up step
by step to reach 15 per cent on 5 October 1989. By 26 October Nigel
Lawson felt constrained to resign, followed almost immediately by the
resignation of Sir Alan Walters from his part-time appointment
(probably the only instance in history of an economic adviser resigning
because his advice was preferred by the head of state). Yet just a year
later, on 5 October 1990, the Prime Minister herself announced from
outside 10 Downing Street that with effect from 8 October Britain was to
enter the Exchange Rate Mechanism of the European Monetary System
(and that the Bank was bringing its Minimum Lending Rate down from
15 to 14 per cent). This was much more than a tactical monetary
manoeuvre. However unintended, it seemed to herald the end of the
sovereignty of the pound sterling, and led within two months to the
overthrow of Mrs Thatcher. Monetary policy dominated politics. As it
turned out Britain remained in the ERM for less than two years - only
until Black (or White) Wednesday, 16 September 1992.
EMU: the end of the pound sterling?
Radical currency reform, while rare in England's long history, has been
endemic on the Continent: a contrast which may help to explain Britain's
5 The reasons for finally choosing an inflation target in 1997, instead of the previous
confusing and ineffectual money-supply targets are clearly given in HM Treasury's
report on 'The New Monetary Policy Framework', October 1999.
444 BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
uniquely strong reluctance to accept the currency changes involved in
European Economic and Monetary Union (EMU), and which the other
members more readily welcome. Most European countries, large or
small, have repeatedly had to carry out changes which have drastically
altered their internal currencies. Admittedly Britain's actual coinage, ever
since Anglo-Saxon days, has undergone cycles of debasement and reform.
Admittedly too, 'the pound in our pocket', despite Prime Minister
Harold Wilson's denial in 1967, has been grossly devalued. However, the
pound as a unit of account has never had to be replaced by a 'new pound'
or any other designation in 1,300 years, in contrast to the French franc or
the various German currencies such as the Reichsmark, Rentenmark,
Ostmark and Deutsche Mark, to mention merely some of the more
modern changes. In contrast to such major changes, the two minor
changes even remotely comparable in twentieth-century Britain were,
first the cessation of the internal circulation of the gold sovereign and half
sovereign in 1914, and secondly decimalization in 1971. The former had
been proposed by Ricardo a hundred years earlier and took place without
a hitch; as did the latter, after attempts at reform spread leisurely over 150
years. A proposal by Lord Wrottesley in 1824 in favour of currency
decimalization was rejected by Parliament, as were similar proposals
following a number of other reports, including those of the Select
Committee of 1853 and the Royal Commissions of 1857 and 1918. At
long last, following the Halsbury Report of 1963 currency decimalization
arrived with effect from 15 February 1971, and turned out to be, despite
the irrational fears of opponents, so successful as to be termed a 'non-
event'. For Britain the changes proposed by EMU are uniquely different
in kind from those faced in her previous history: for most of the other
countries such changes simply represent their own history repeating itself
on a larger scale.
A second basic difference between sterling and continental European
currencies springs from the fact that the pound had been paramount in
international trade for two hundred years but remained (except for
Scandinavia and Portugal) relatively unimportant in intra-European
trade. Conversely even the major European currencies were
unimportant in international trade outside their own colonies. Thus
when sterling went off the gold standard in 1931 the Scandinavian
countries and Portugal chose to join the Commonwealth countries as
part of the sterling area, since Britain was their major trading partner.
But this situation was interrupted with the outbreak of war in 1939,
which temporarily severed and permanently weakened the connection
with the European members of the sterling area. France had managed
to cling to its variant of the gold standard until 1936 and thereafter
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
445
continued until the war to be the centre of a franc bloc which included
most of the non-German European countries south of Scandinavia.
Until the First World War the pound had no rival overseas, nor, except
for the US dollar, until after the Second World War. On the Continent
however it had always faced strong competition, especially from the
French franc. Throughout the long era of sterling supremacy it was the
other countries that had in the main to adapt their currency
arrangements to fit in with sterling. From 1945 to 1972 Britain, like
other countries, had to fit its currencies to the exigencies of the dollar.
From the time that Britain belatedly entered the EEC on 1 January 1973
she too had to undergo the difficult transition involved in adapting
sterling to the currency arrangements of her EEC partners, a change in
attitude greater than that required from these other participants.6
Continental Europeans have long been accustomed to currency unions:
for Britain before 1990 they have been either unnecessary or peripheral.
Thus in 1865, under French initiative, a Latin Monetary Union was
formed eventually comprising France, Italy, Belgium, Switzerland,
Bulgaria and Greece. The primary gold and silver coins of each country
were made legal tender and circulated throughout the Union, though
subsidiary, token coins were legal tender only within their own country.
The Union lasted until the 1920s, by which time the strains of the wars
and the widening differences between the value of gold and silver caused
its gradual demise. A rather similar pattern was seen in the Scandinavian
Monetary Union formed in the 1870s, until, under similar pressures it was
effectively dissolved by Sweden in 1924. By far the most successful of all
such currency unions, but embracing much more than just the currency,
was the Zollverein of 1834, whereby the separate currencies, weights and
measures of the previously independent thirty-nine German states were
gradually combined, leading to the unification of Germany in 1871, with
the chief Prussian bank becoming the Reichsbank. We have already noted
how the formation of the Bank for International Settlements at Basle in
1930 emerged from the inter-war arrangements regarding German
reparations, and we shall see how in a similar way the disbursement of
Marshall Aid to Europe after the Second World War paved the way for
new forms of European monetary co-operation.
During and immediately after that war almost every country on the
European continent experienced the destruction and reform of their
currencies. Germany reformed her currency in 1948 (on which her
subsequent success was based) after having suffered two hyper-
inflations in a generation. The former German-occupied countries,
6 See G. Davies, 'The single currency in historical perspective', British Numismatic
Journal, 69 (1999), 185-7.
446
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
from France to Norway, got rid of their wartime inflation by means of
overnight currency reforms whereby their grossly inflated wartime
currencies were reduced by up to a hundredfold or more, thus not only
providing the basis for a sound new currency but also penalizing
collaborators, profiteers, tax-evaders and similar unworthy holders of
swollen money balances. At the same time, it provided the grandest and
most perfect example of the effectiveness of the quantity theory of
money administered at a stroke and, most unusually, in a price-reducing
manner. Thus in glaring contrast to the British, most continental
families or their parents have personally experienced drastic currency
reform, followed by unprecedented growth in their living standards. For
them EMU was just another logical step, not the leap in the dark it
seemed to a considerable section of British opinion, especially among
the older and more influential generation. In the light of this
geographical contrast the main steps taken since 1945 in Europe
towards greater currency convergence and exchange rate stability will
now briefly be outlined in order to place in perspective the Delors
'Report on Economic and Monetary Union' of April 1989, which,
when fully implemented, would in effect, mark the end of a dozen
currencies, and their replacement by a single currency serving the whole
Eurozone.7
The Bretton Woods agreement of 1944 envisaged an idealized post-
war world of convertible currencies, fixed exchange rates and free trade.
It had become painfully obvious by 1947 that the transition towards
such a system would require substantial assistance to Europe from the
USA. The immediate dollar shortage from which the war-torn countries
of Europe suffered was in large part met by the European Recovery
Programme proposed by General George Marshall in a speech at
Harvard on 5 June 1947. To help ensure the effective distribution of
Marshall Aid, an Organization for European Economic Co-operation
was formed (becoming enlarged in 1961 to the permanent Organization
for Economic Co-operation and Development), which also helped
during the period 1948-50 to broaden the existing restrictive bilateral
payments system into wider multilateral clearings. By 1950 sufficient
progress had been made to set up the European Payments Union, which
enabled its fifteen member countries mutually to offset deficits and
surpluses, up to the limits of their quotas. These quotas were set
according to each country's share of world trade in 1949. Significantly
Britain's quota at $1,060 million was over one-quarter of the total, with
France's at $520 million and Germany's at only $320 million. The Bank
for International Settlements fittingly acted as the agent for EPU with
the accounts reckoned in a new abstract common denominator, the
7 See Chapter 13 below.
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
447
European Accounting Unit (EAU) initially equal to one US dollar or
0.888671 grams of fine gold. In that same year of 1950 the European
Coal and Steel Community was established, which grew by means of
the Treaty of Rome (25 March 1957) into the EEC of the original Six:
Benelux, France, Germany and Italy. Britain remained insular. By
December 1958 Britain and most other European countries made their
currencies convertible to such a degree that EPU became superfluous
and was terminated. An enlarged role was found for its replacement
under a new European Monetary Agreement with a larger fund to
assist currency stabilization. The Treaty of Rome had also set up the
European Investment Bank to counter overcentralization and to foster
regionally balanced growth through granting long-term loans for
infrastructural projects and also 'global finance', through
intermediaries like Britain's ICFC, to smaller enterprises. Whereas the
origins and constitutions of BIS and EIB differed, they were
complementary institutions with close and continuous co-operation
facilitated by sharing at least one director and by both using the EAU as
their official accounting currency. This latter point was much more than
being the technical detail it might first appear; and it was to become
later of strategic importance with regard to British participation in
EMU. It prepared the way for the Ecu and then the euro.
The extreme and apparently persistent dollar shortage of the 1940s
and 1950s gave way in the next two decades to an increasingly stubborn
dollar glut. Foreigners' liquid claims on US dollars increased tenfold
from around $7 billion in 1953 to around $70 billion in 1971. Over the
same period US gold reserves fell from over $22 billion to less than $11
billion. The inescapable decision facing the US authorities was taken on
15 August 1971 when the convertibility of the dollar at the fixed price of
$35 per ounce of gold was ended. The foundation of the Bretton Woods
system of fixed exchange rates collapsed. After some five months of
severe dollar turbulence a meeting of the 'Group of Ten' major
economies was held in December 1971 at the Smithsonian Institute in
Washington, as a result of which dollar currency parities were realigned
and the participants agreed to keep fluctuations within 2'A per cent
either side of their new parities (compared with the 1 per cent swing
allowed under the Bretton Woods regime). This realistically allowed
much greater rate flexibility while yet providing a framework of settled
parities with the world's major trading currency. In a brave but abortive
search for still greater stability, the UK joined the EEC's 'narrower
margins scheme' (the so-called 'snake') on 1 May 1972; but after only
six weeks and despite the member central banks' strong support for the
weak pound, the government decided on 23 June to float the pound.
448
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
Thus for the first time since 1939 sterling floated freely against all
currencies - and was to remain floating for eighteen years until October
1990.
The British monetary pendulum had thus swung suddenly from firm
faith in the virtues of fixed exchange rates, to an equally fervent belief
in the extreme monetarist doctrine espoused by Milton Friedman and
his followers in favour of floating rates and of 'letting the market
decide' (Friedman 1953). Protagonists of floating exchange rates could
point to the long experience of Canada, to the release from 'stop-go'
restrictions, to steadier, more sustained growth now that there was no
need to keep idle reserves to defend a fixed rate, etc. In the quiet,
uncomplicated model world of both classical and monetarist
economists the Purchasing Power Parity theory might well work in the
long run (during which British manufacturing industry nearly died).
Although the PPP theory — that the underlying exchange rate in free
markets is a reflection of countries' relative prices of traded and
tradeable goods and services - has some merit, that does not justify
claiming that an equilibrium rate, and far less that an equilibrating or
stabilizing rate, will arise from the untrammelled working of market
forces. The foreign exchange market has rarely been a perfect market
which would allow a supposed 'equilibrium' rate to emerge such as
would necessarily be superior to the arbitrarily judged rates fixed by the
monetary authorities.
The effects of relative price levels as determinants of exchange rates
in free markets are swamped by capital transfers, arbitration and
financial speculation. Even leaving aside such transfers, in modern
conditions dealings in key commodities alone are sufficient to cause de-
stabilization. The experience of that most volatile commodity, oil, in
recent decades had shown that 'unfettered markets have had a record of
making monumental mistakes endangering the livelihood of millions.
The spot markets, selling and reselling cargoes, turn over a hundred
times as many "paper barrels" as the real stuff and over-emphasize
transient factors' (OPEC Bulletin August 1990, 3). Even in normal
periods foreign exchanges not based on actual goods predominate. A
study made for the European Parliament noted that 'the volume of
financial transactions exceeded turnover in world trade in real terms by
a factor of 25' ( The European Financial Common Market, June 1989,
17). This imbalance is especially so in the UK, given that London is still
the world's largest foreign exchange market but has long ceased being
the world's largest importer or exporter of goods. A co-ordinated
survey of foreign exchanges by the Bank of England, the Bank of Tokyo
and the Federal Reserve Bank of New York in March 1986 showed their
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
449
average total daily turnover at nearly $200 billion, with London's at $90
billion, New York's at $50 billion and Tokyo's at $48 billion (BIS 57th
Annual Report, 1987, 163). Little wonder then that free foreign
exchange markets, far from being naturally equilibrating, in actual fact
often tend to be volatile and destabilizing, while even the authorities'
corrective measures themselves not infrequently lead to 'overshooting'.8
Such overshooting occurred repeatedly during the eighteen years of
Britain's monetarist experiment with floating rates. Despite enforced
interventions (castigated by the more extreme monetarists as 'dirty
floating') to control the most violent movements, the value of the pound
swung from around $2.45 in 1975 to $1.60 a year later, back to over $2.40
in 1980, only to fall to a record low point of just above $1.0 in 1983. In no
way could swings of such amplitude be said to be caused by changes in
relative price levels. While speculators might profit from such wild
swings, the uncertainties facing producers and traders in real goods and
services was obvious. Although all the world's currencies suffered from
the gyrations of the dollar (mainly), yet the EEC's system of combining a
joint float against the dollar with narrower margins for their own
currencies gave greater security than isolated floating, and even for a time
attracted countries outside the EEC such as Sweden and Norway to join
this 'snake inside the tunnel'. Britain's stance with one foot in Chicago
and one in Brussels was becoming too painful to endure. It was thus
becoming increasingly conceded by the late 1980s that Britain needed the
sort of anchor that the rest of the EEC had forged since 1979.
On 13 March 1979 the EEC began operating its European Monetary
System (EMS) to create a zone of monetary stability in Europe and to
strengthen the economies of its less prosperous members. The Bank of
England was heavily engaged in preparing the structure and operational
details of the new scheme, thus smoothing the way for the UK's
hesitant, step-by-step approach to full membership. The main features
of the EMS include an Exchange Rate Mechanism (ERM) which was a
replacement and improvement on the original 'snake', allowing similar
fluctuations of 2'A per cent either side of an agreed central rate but with
a 6 per cent swing initially allowed for weaker entrants such as Italy,
Spain and eventually Britain. Secondly, the European Monetary Co-
operation Fund, originally formed in 1973, was strengthened by the
deposit of 20 per cent of each member's gold and dollar reserves.
Thirdly, a new European Currency Unit, the Ecu, was formed, based on
the weighted average of ten European currencies, including the pound
and the drachma though neither Britain nor Greece were initially full
participants of the ERM.
8 This problem is dealt with more fully in Chapter 13.
450
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
The UK became from the start a contributor to the Monetary Co-
operation Fund and a most enthusiastic promoter of wider use of the Ecu;
but decided not to join ERM. This refusal sprang not only from the
influence of monetarism, with its inbuilt preference for floating rates, but
also from the government's more practical consideration that the pound's
position as a petro-currency would expose it to greater and more divergent
pressures than those facing the other EEC currencies. In keeping with the
UK's more market-related philosophy, it decided on 23 October 1979, just
six months after the start of EMS, boldly to remove all foreign exchange
controls. The removal after some forty years of these protective devices
gave a lead to the rest of the EEC in this field and further strengthened the
role of the City in the world's financial markets. When, for the reasons
given above, the UK finally turned its back on the dubious joys of isolated
floating and with typical belatedness joined the ERM on 8 October 1990,
the EEC had moved on to consider the still greater challenges of the
Delors Report: challenges not easily dodged by procrastination.
By December 1985 all members of the EEC had agreed to a 'Single
European Act' to create by the end of 1992 a unified economic area in
which goods, services, people and capital would be able to move freely. As
part of the implementation process, the European Council invited M.
Jacques Delors, President of the European Commission, to chair a
committee with the task of studying and proposing concrete steps leading
to economic and monetary union. Among its other sixteen members were
the heads of member central banks 'in their personal capacities', including
Robin Leigh-Pemberton, and Karl Otto Pohl; and Alexandre Lamfalussy,
General Manager of BIS. The subsequent Report on Economic and
Monetary Union in the European Community (April 1989) proposed a
three-stage programme with 1 July 1990 as its starting date. Although no
dates were proposed for the subsequent stages, 'the decision to enter upon
the first stage', said the report with expectation bordering on arrogance,
'should be a decision to embark on the entire process' (para. 39). What
proponents saw as an integrated and logical progression, opponents saw
equally clearly as a slippery slope towards an irrevocable loss of economic
and political sovereignty. Furthermore, unlike previous and premature
attempts at EMU, such as the Werner Report of 1970, which failed not
only because of the oil shocks of that decade but also primarily because
the French and German economies had not converged sufficiently, the
Delors Report came at a time when the economies of the inner core
comprising France, the reuniting Germany, Benelux and possibly also Italy
had already converged to a degree sufficient to provide a seemingly firm
foundation for its bold proposals. The unconverged UK remained
unconvinced.
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
451
The main proposals for Stage One were that (a) 'a single financial
area' should be established 'in which all monetary and financial
instruments circulate freely and banking, securities and insurance
services are offered uniformly throughout the area'; (b) 'all Community
currencies are in the exchange rate mechanism'; and (c) 'all
impediments to the private use of the Ecu should be removed' (para.
52). During Stage Two the Community would (a) 'set precise rules
relating to the size of annual budget deficits and their financing'; (b) see
that a 'European System of Central Banks (ESCB) - would be set up';
and (c) require that 'the margins within ERM be narrowed'
progressively to zero (paras. 56, 57). Thus 'Stage Three would
commence with the move to irrevocably locked exchange rates' (para.
58); 'The transition to a single monetary policy would be made with the
ESCB assuming responsibility for the formulation and implementation
of monetary policy'; while 'the change-over to the single currency
would take place during this stage' (para. 60). Rarely has the publica-
tion of such a brief report (of just forty pages) had such a wide, deep
and controversial impact: irrespective of the timing and extent of its
eventual implementation, the Delors Report gave public notice that
neither the Bank of England nor the pound sterling would ever be the
same again. The days of the sovereignty of the pound seemed
numbered.
The increased sovereignty of the consumer in a greatly enlarged
single market of over 300 million people could no longer be co-
terminous with national boundaries under the authority of a sovereign
parliamentary executive as much as had previously been the case.
Once every banking institution in the Community is free to accept deposits
from, and to grant loans to, any customer in the Community and in any of
the national currencies, the large degree of territorial coincidence between a
national central bank's area of jurisdiction, the area in which its currency is
used and the area in which its banking system operates will be lost. (Delors
Report, para. 24)
For such reasons Delors very logically proposed that 'the domestic
and international monetary policy-making of the Community should
be organised in a federal form in ... a European System of Central
Banks, consisting of a central institution and the twelve national central
banks' (para. 32). (Because ESCB has many eye-catching, but mostly
superficial, similarities with the US Federal Reserve System it has often
been dubbed 'Eurofed'.) 'The ESCB would be committed to the
objective of price stability', consequently 'the ESCB Council should be
independent of instructions from national governments and
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BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
Community authorities' (para. 32). Given the dismal failure of Britain's
monetarist policies to eradicate inflation even after twenty years of
making that objective its explicit target, the need for such independence
cannot reasonably be gainsaid. British experience merely brings forcibly
up to date the unmistakably clear lessons of history that governments
without specific constitutional safeguards cannot be trusted to control
their money-making powers sufficiently to achieve stable money.
Furthermore monetary policy alone, unless this is taken to include key
aspects of fiscal policy, cannot bring price stability. Hence there must be
effective co-ordination between budgetary and monetary policy with
'upper limits on budget deficits, exclusion of access to direct central
bank credit and limits on borrowing in non-Community currencies'
(para. 33). This provides another example where consumer sovereignty
requires the limitation of political sovereignty.
Now whereas the Delors formula might well suffice for the majority
of EEC countries to succeed in their fight against inflation, in Britain's
case something more is vitally necessary, as was clearly recognized by
Nigel Lawson right from the early days of MTFS. 'To achieve stable
prices', he wrote, 'implies fighting and changing the culture and
psychology of two generations. That cannot be achieved overnight. But
let there be no doubt that that is our goal' (1984, 11). It was most
unfortunate for Mr Lawson and for the UK that British attitudes are so
infuriatingly slow to change. But when the time is overripe they can
change dramatically.
It was largely in order to gain time for Britain to adjust to the
demands of EMU that the Major/Butler plan for a 'hard Ecu' was
devised. This envisaged that, instead of the EC's twelve currencies being
suddenly replaced with the (ordinary) Ecu at a specific time in Stage
Three, the 'hard Ecu' would be a parallel or common currency growing
in use naturally according to the demands of the financial markets,
competing with and possibly eventually supplanting the other
currencies. In essence the idea is neither new nor peculiarly British.
Thus within a year of the start of the Ecu, Daniel Strasser, the European
Commission's Director-General for Budgets, wrote that 'There is every
reason to suppose that step by step the point will be reached when
conditions will be ripe for a European currency to take its place
alongside the national currencies. This development will certainly be
speeded up by the introduction of the Ecu' (Strasser 1980, 30). The case
for the UK's 'hard Ecu' was put very strongly by the Governor of the
Bank of England to European parliamentarians at Strasbourg on 11
July 1990, where he pointed out that the 'hard Ecu' would be 'quite
different from the current Basket Ecu' which simply mirrors the average
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
453
values of the twelve currencies, whereas the hard variety would not only
be as strong as the strongest of these but also 'could never be devalued'
{BEQB, August 1990).
Opposition to the hard Ecu as an unnecessary thirteenth currency (or
possibly fourteenth, since it differs from the basket version) has come
from influential quarters; and Mrs Thatcher herself damned it with
faint praise. At a conference at the London School of Economics in
November 1990 Karl Otto Pohl, president of the Bundesbank, roundly
condemned the hard Ecu proposals as 'the worst possible recipe for
monetary policy'. At the same time a report from the Select Committee
of the House of Lords on EMU and Political Union firmly rejected the
hard Ecu in favour of the single currency, as being the only sensible
route to EMU. The committee, chaired by Lord Aldington, was
composed mainly of Conservative and Independent peers and,
significantly, included two former Governors of the Bank of England,
Lord Cromer and Lord O'Brien. Fears that Britain might be relegated
to a 'lower tier' within the European Community was shared by the
City and industry. Reference has already been made to London's leading
position in foreign exchange shown by a survey in 1986. A new survey
carried out in April 1989 confirmed London's lead, with daily foreign
exchange turnover of $187 billion compared with $129 billion for New
York and $115 billion for Tokyo. A third survey, taken in April 1992,
showed that London had impressively extended its lead, with its daily
turnover of foreign currencies rising to $300 billion compared with $192
billion in the USA and $128 billion in Japan, {BEQB November 1992).
London's lead in foreign equity dealing is even more impressive. 'In
1988 London's turnover in foreign equities at $71 billion was nearly one
and a half times that of New York and ten times that of Tokyo' {BEQB
November 1990). These advantages might well be put at risk if the UK
were in the lower tier, while the benefits to industry of lower
transactions costs enjoyed by any possible top tier business might
likewise be lost.
Because Thatcherism depended so singularly on monetary policy,
any transfer of decision-making power in the financial area, such as is
bound to occur with EMU, was certain to be keenly felt. As the EEC
progresses by whatever route towards EMU, 'the shift from national
monetary policies to a single monetary policy is inescapable' (Delors
Report, para. 24). Furthermore because 'transport costs and economies
of scale would tend to favour a shift in economic activity away from less
developed regions especially if they were at the periphery to the highly
developed areas at its centre', structural adjustments would have to be
made to 'help poorer regions to catch up with the wealthier ones'
454
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
(Delors Report, para. 29). The interventionist nature of stronger
structural and regional policies had either been rejected, or accepted
with great reluctance, by Mrs Thatcher, despite being seen as a
welcome necessity by her European partners — and by many of her
former ministers, e.g. Michael Heseltine, Sir Ian Gilmour and Peter
Walker.
The inter-governmental conferences and the treaty amendments
required to implement the next stages of EMU should offer all members
enough opportunities to adjust their parities so that they could be finally
fixed in such a way (e.g. at arithmetically convenient rates) so as to meet
both the demands of a single currency for wholesale and larger retail
trading throughout the Community while still retaining national
currency names for internal, mostly small-scale retail trade (which will
always amount to the overwhelming number of transactions) . However if
a substantial majority of the twelve eventually carry out their stated
intention of going directly to a single currency, there is little to be said in
favour of Britain's attempt to jump the gap in two hops. As previously
indicated, many of the apparently most difficult problems —
decimalization, currency reform, and the most recent and telling
example of the merging of the two German marks - turned out to be
much easier than had been anticipated. With regard to the last,
academics, lawyers, economists, bankers and civil servants in endless
committees could have enjoyed decades of discussion backed up by
shoals of published and most erudite papers in order to come to
ineffective and controversial decisions as to whether one D-mark was
worth 7.36 or 3.27 or 2.73 East-marks, for 'hardly any reliable bench-
marks were available for the "correct" conversion rates' (Monthly Report
of the Deutsche Bundesbank, July 1990, 14). In the event Chancellor
Helmut Kohl determined swiftly, simply and boldly on round figure one-
for-one and one-for-two rates for different categories, to be worked out
in detail by his 'independent' Bundesbank and the East German
monetary authorities with immediate effect from 1 July 1990. But only a
strong economy with a strong currency could make such a decision
work. The sovereignty of the people depends on their productivity. In
Euro-jargon effective 'subsidiarity', or rule by the lower levels of
government, depends on the economic clout of the nation or region in
question.
In concluding this analysis of British monetary development in the
twentieth century, the key to understanding its complexity has been
shown to be the inherent tendency of money, both in practice and in
theory, to swing like a pendulum between periods when there is an
institutional and theoretical compulsion to press for increased quantity
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
455
and decreasing quality, and then suddenly to veer back to periods when
all the emphasis returns to efforts at restoring quality through
controlling the quantity. At the dawn of a new century, the intervening
stage before universal money displays similar pendulate tendencies,
global finance will be operating with tri-polar currencies; the dollar, the
yen and, last but not least, the new euros: an uneasy troika.
The timetable for the Delors Report and, possibly some of its
essential principles also, seemed in danger of being thrown overboard
during the speculative storms which lasted intermittently from mid-
1992 to August 1993. Even Sweden, normally a most stable
sound-money economy, raised its official short-term interest rate in
September 1992 to 500 per cent. The date of 16 September 1992, when
international speculators forced Britain to leave the Exchange Rate
Mechanism, was at first called 'Black' Wednesday, by the narrow
sound-money men, but then dubbed 'White' or 'Bright' Wednesday by
those with a broader view of economic realities, because it paved the
way for an overdue and substantial fall in British interest rates sufficient
to revive the economy form the dismal slump of 1990—2. Less than a
year later the hungry and expectant speculators turned their attention
to a number of other currencies, especially the franc, forcing a hurried
general reorganization of the ERM. As from 1 August 1993 the official
currency bands were hugely extended, from 2'A per cent to as much as
15 per cent on either side of the central parity. With permissible swings
of up to 30 per cent between the strongest and weakest currencies
(another case of overshooting) the drive towards a single currency had
for the time being gone rapidly into reverse. Even more than the break-
up of the Bretton Woods system of fixed exchange rates in 1971, the
disruption of the ERM in 1992-3 demonstrated in a most disconcerting
manner to the world's monetary authorities and to the over-confident
planners in Brussels that few nations, armed as they are with the
relatively puny reserves of their central banks, even when they manage,
painfully, to act in concert, can stand out against the vast resources at
the disposal of the international speculators who seize their profitable
chances whenever rates of exchange are perceived to be unrealistic.
Their actions provide a most instructive example of the increasing
global sovereignty of the consumer, which greatly limits the degree of
sovereignty previously enjoyed by national monetary authorities. It is
becoming ever harder to 'buck the market'. Granted that the central
banks can normally be the largest single operators, yet even the UK's
official reserves which stood at $43 billion in September 1993, form
little more than a drop in the ocean of the trillion-dollar-a-day foreign
exchange market.
456
BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY
The dawn of a single European currency, planned with complacent
confidence in the 1980s, seemed by mid-1993 to have been pushed much
further away, at least into the early years of the next millenium. This
was certainly then the view of the British government, with the 'fault
lines' of the ERM pointedly exposed by the rare appearance of a signed
article by the Prime Minister, John Major, in The Economist (25
September 1993). Such pessimism was roundly rejected by most of the
other EC leaders, especially Chancellor Kohl and President Mitterrand.
No doubt the number of countries willing and able to attach themselves
to the inner core and its single currency will wane and, mostly, wax, in
the usual pendulate fashion, as their economies diverge or converge.
The EC had already officially become a 'single market' with no barriers
to capital, labour, goods or services, from 1 January 1993, while the
Maastricht treaty had also come into force from 1 November of the
same year, reconfirming the timetable for a single currency by the end
of 1999 at the latest. Despite possible slippage, the momentum towards
European Monetary Union appeared to be too great to be halted
indefinitely. To re-echo Montagu Norman, the dogs bark but the
caravan moves on - this time roughly in the right general direction.
Germany's long record of financial rectitude was rewarded by the
decision to set up the headquarters of the European Monetary Institute
- and so eventually of the European Central Bank - in Frankfurt. The
first head fittingly chosen for the Institute was Baron Alexandre
Lamfalussy, the Belgian General Manager of the Bank for International
Settlements, which had long acted as a quasi-central bank for thirty or
so central bankers and had, ironically, originally been set up, as
described earlier, in 1930 in order to reorganize German reparations. It
is painfully apparent that the change from national moneys to larger
regional money blocs is fraught with problems as yet only partially
resolved. The even more remote goal of a single, universal money still
beckons, a vision for bloodless world citizens and a nightmare for
nationalists. In the mean time the foreign exchange markets, in which
London is still likely to play the major role, will be operating with three
main currencies; the dollar, the yen and the new euro as the symbol of
wider and deeper financial, economic and probably also political,
integration. An assessment of the importance of more recent
developments is given below (see Chapter 13).
American Monetary Development
since 1700
Introduction: the economic basis of the dollar
The American dollar, by far the world's most important currency for
most of the twentieth century, is the natural product of what has long
been and still remains easily the world's strongest economy.
Nevertheless the strength of the dollar relative to gold, and (much more
importantly) relative to other currencies, has fluctuated widely so
causing greater problems and creating greater opportunities for traders
and speculators than has been the case with any other currency,
including gold. The role held undisputedly by sterling for a hundred
years before 1914, based on the world's first industrial revolution, has
been overtaken by the US dollar since about 1931, reluctantly at first,
but all the more inevitably because the choice of the dollar as the
world's major trading currency was made by the practical everyday
decisions of the rest of the world. The dollar climbed to its
international eminence on the back of its factories and farms. The
strength of the dollar was not derived from the strength of the
American financial system; rather the reverse, for time and time again
throughout its history the dollar, weakened by endemic failures, has
been restored to strength through the robust power of American
agriculture, forestry, mining, manufacturing industry and managerial
expertise. The fact that major international institutions like the World
Bank and IMF set up their headquarters in Washington simply
endorsed and reinforced a choice that had already been made by the
world's markets and underlined universal acceptance of the belief that
the value of the dollar was too important a matter to be left to the
decisions of American politicians alone.
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AMERICAN MONETARY DEVELOPMENT SINCE 1700
The role of the dollar made economic isolation obviously impossible
for the USA and, only a little less obviously, political isolation also.
Such integration has meant that increasingly during the second half of
the twentieth century global finance speaks with an unmistakably
American accent, for far more trade, internal and external, is carried on
in dollars than in any other currency. The almighty dollar was not
something consciously forced on the rest of the world by American
politicians skilfully aware of their growing power; it was a role volun-
tarily chosen by the rest of the world with only occasional and
ineffectual cries of protest from (mainly French) politicians and of course
from academics on both sides of the Atlantic. The process by which the
dollar rose to such prominence from its humble and inauspicious
origins two centuries ago will now be examined with particular refer-
ence to the ways in which the American constitutional and legal framework
has influenced the structure and operations of its financial system.
Colonial money: the swing from dearth to excess, 1700-1775
Colonial America offered a clean slate where the immigrants repeated
their age-old European monetary habit of swinging from an initial dire
monetary shortage to reach eventual inflationary excess. In the early
years, for at least two or three generations, particularly but not
exclusively in the frontier zones, the colonists were drastically short of
money - not just in the simplest sense that everyone feels that he or she
could do with more money — but in the realistic, economic sense that
the colonists' actual, and still more their potential, productive
capacities were curtailed by an obvious lack of currency. Actual money
supply chronically fell short of demand; and in such circumstances
those lucky enough to possess money held on to it more cautiously than
they would otherwise have done, so decreasing monetary velocity and
thus intensifying the shortage. In money matters, as in so many other
fields, the colonists had to compromise and experiment, compensating
for the dire shortage of official coins by resorting to a wide variety of
money-substitutes, many of which they would have disdained to use in
their countries of origin. A large proportion of immigrants, such as
indentured labourers, servants and slaves were so poor that they
brought few if any possessions and little or no money with them. No
silver or gold mines were found in these early colonies to supply
indigenous sources of money. Furthermore the trade balance with
Britain was generally heavily adverse, thus exerting a strong and
sustained pressure to drain bullion and specie away from what little
reserves the colonists had managed to build up. This drain from the
AMERICAN MONETARY DEVELOPMENT SINCE 1700
459
weak to the strong accorded well with contemporary European
mercantilist thought, but it ran counter to the needs of an undeveloped
country heavily in debt to Britain and finding it increasingly difficult to
service its debt in sterling — an economic and monetary conflict of
interest which underlay the political forces leading to revolution.
The main sources which provided the colonists with their essential
money supplies fall into five groups. Essential for frontier trading with
the indigenous population, but also thereafter widely adopted by the
immigrants themselves, were the traditional existing native currencies
such as furs and wampum. Such adoption greatly increased their
monetary significance. Second, and in some ways similarly, since they
were mostly natural commodities, came the so-called 'Country Pay' or
'Country Money' such as tobacco, rice, indigo, wheat, maize etc. -
'cash crops' in more than one sense. Third, and playing an important
role in distant as well as local trade, came unofficial coinages, mostly
foreign, and especially Spanish and Portuguese coins. Fourth came the
scarce but official British coinage, the golden guinea, the silver crown,
shilling etc. and the copper pennies, halfpence and farthings. Fifth, and
of greatly increased importance in the colonies' later years, was their
own paper currency of various kinds, eagerly accepted as a welcome
deliverance from the irksome restrictions of commodity money and
coinage. Rates of exchange between the various types of money varied
considerably over time and space. An indication of the shortage of
official coins and of the resultant wide variety of substitutes is given by
the fact that during 1715 in North Carolina alone as many as seventeen
different forms of money were declared to be legal tender. However it
should be remembered that all these numerous forms of means of
payment had a common accounting basis in the pounds, shillings and
pence of the imperial system. To some extent this reduced the internal
exchange rate problem. Obviously opportunities for profitable
arbitrage-type operations remained in plenty, the obstacles themselves
thus creating an incentive to overcome them. But what was profitable
for the individual imposed a needless social cost on the community.
Before briefly examining each of the main groups of money, it is easy to
see that the colonial monetary 'system' lacked any systematic cohesion.
The colonists improvised in different ways in different localities. Any
attempt at a coherent overall solution had to await the deliberations of
the post-revolutionary governments in the last decade of the eighteenth
century.
The most popular of the indigenous types of money by far was
wampum (already described in some detail in our chapter on primitive
money). We noted its ready acceptance by the immigrants as legal
460
AMERICAN MONETARY DEVELOPMENT SINCE 1700
tender and the large-scale production in factories for turning the raw
shells into wampum money-belts. We noted further that wampum was
used not only for small payments but also for large credits, such as the
loan in wampum worth over 5,000 guilders arranged by Stuyvesant in
1647 for paying the wages of the workers constructing the New York
citadel. Wampum became for many years a widespread, durable,
attractive, versatile and absolutely essential supplement to the more
conventional but scarcer forms of currency. What long-established
wampum was to indigenous moneys, tobacco quickly became as the
leading type of the new forms of 'country pay money' developed by the
immigrants as they began making more general monetary use of the
crops best grown in their particular localities. Tobacco, introduced
from the West Indies, first began to be used as currency in Virginia as
early as 1619, barely a dozen years after the colonists' first permanent
settlement was founded in Jamestown in 1607. As Professor Galbraith
shows in his most readable account of Money: Whence It Came and
Where it Went, tobacco was used as money in and around Virginia for
nearly 200 years, so lasting about twice as long as the US gold standard
(1975, 48). In order to overcome the workings of Gresham's Law, by
which good tobacco was driven out of circulation by bad, a system of
authorized certificates began to be used, attesting to the quality and
quantity of tobacco deposited in public warehouses. These quasi-
certificates of deposit, or 'tobacco notes' as they became known,
circulated much more conveniently than the actual leaf and were
authorized as legal tender in Virginia in 1727 and regularly accepted as
such throughout most of the eighteenth century. Colonial experience
with other forms of 'country money' such as wheat, maize, rice, beans,
fish, indigo, and derivatives such as whisky and brandy, duplicated,
though less successfully, that with tobacco.
The use of foreign coins as currency had been so common in Europe
and elsewhere for hundreds of years that its reappearance in America
was in the main regarded as simply an unsurprising, unfortunate,
inconvenient but unavoidable if rather old-fashioned necessity. It
enabled the official British currency to be economized in general use
and to be given priority as and when required for official payments.
There were, however, a number of factors of special significance with
regard to America's resort to foreign coins and other unofficial forms of
money. First was the unusual extent and duration of such enforced
dependence on uncertain and costly foreign supplies. The uneven
geographical distribution of the slippery supplies of foreign coins led to
intense rivalry among the colonies, which in their scramble for greater
shares resorted to a historically early series of competitive devaluations,
AMERICAN MONETARY DEVELOPMENT SINCE 1700
461
foreshadowing in their beggar-my-neighbour results the international
devaluations of the twentieth century. A further feature was the bitter
frustration caused when many of the attempts by the colonists to print
or mint their own money were strictly forbidden by the British
government. The underlying constitutional conflict was aggravated
when Britain subjected the colonies in the mid-eighteenth century to
stricter controls over their trading with the West Indies, Mexico and
South America, with which they had a favourable balance of trade, and
from which therefore they gained the bulk of their foreign coins.
Familiarity with foreign coins, coupled with the difficulties encountered
in securing enough sterling, led Carolina and later the country as a
whole to adopt the dollar and not the pound as the basis of its currency.
The first and only colonial mint of any consequence was that set up
by a successful merchant, John Hull, in Massachusetts, in 1652, coining
silver threepences, sixpences, and, most famous of all, the 'pine-tree
shillings', all of which contained about three-quarters of the silver
content of their newly minted English equivalents (seventy-three grains
compared with the ninety-three in the English shilling), but intrinsically
equal to most of the old, worn and scarce official silver actually in
circulation. The popular pine-tree currency circulated widely until the
mint was forced to close down in 1684. Hull made his fortune in thus
partially and temporarily filling the currency gap, but this success
apart, the colonies continued to rely on the confusing variety of all sorts
of foreign coins, but with a marked and growing preference for the
Spanish peso minted in Mexico City and Lima and the Portuguese
eight-real piece. Both these large silver coins were practically identical
in weight and fineness, being based on imitation of the famous 'thalers'
which had been produced from the silver mines in Joachimsthal in
Bohemia for centuries — hence the designations 'pieces of eight' and
'dollars'. The English parity of these coins was As. 6d., a rate confirmed
by Isaac Newton, Master of the Mint, in 1717; but as indicated above,
competition between the colonies pushed the market rate much higher.
Thus already in 1700 a piece of eight in the Bahamas exchanged for 55.,
in New York for 6s. 6d. and in Pennsylvania for Is. In 1708 an Act of
Parliament laid down that 6s. was to be the maximum rate which any of
the colonies should use in exchange for the dollar, but in practice this
was of no avail. Similar attempts by the Board of Trade around the
same period to introduce uniform rates throughout the American
colonies were also doomed to fail. These efforts came about not so
much as conscious attempts to prevent competitive devaluation but
rather in order to try to get value for money in official purchases,
especially for the army's pay and provisions. Inflation was, for example,
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AMERICAN MONETARY DEVELOPMENT SINCE 1700
blamed for the lack of equipment and the 'fatal delay' which led to the
defeat of General Braddock at Fort Duquesne in 1755. General Wolfe
similarly complained of lack of funds in his Quebec campaign in 1759:
a victory this time, proving that an army does not always march on its
stomach. Such complaints did, however, stiffen the government's
determination to increase taxation and revenue in America, so spurring
the revolution. As Dr D. M. Clark has shown in her study of The Rise of
the British Treasury: Colonial Administration in the Eighteenth
Century (1960), a shortage of currency 'combined with the necessity of
paying the new duties in sterling aggravated the money problem in the
colonies', concluding that 'in the years between 1766 and 1776 the
Treasury bore the major responsibility for measures inciting to
revolution' (1960, 123, 197).
Much the most important economic result of the currency shortage
was that it caused Americans to turn with the greatest enthusiasm to
printing paper money, especially State-issued notes, generally sooner
and to a greater extent relative to population size than any
contemporary country, despite many attempts by the British authorities
to curtail such issues. As Galbraith inimitably puts it: 'If the history of
commercial banking belongs to the Italians and of central banking to
the British, that of paper money issued by a government belongs
indubitably to the Americans' (1975, 45). Although the frequently made
claim of American priority in note issuing in the Christian world
cannot be substantiated, what was novel was the source of the notes,
being issued either directly by the government or under its express
authorization by its agents (see for example Bogart 1930, 172). The first
such State issue of notes was made in 1690 by the Massachusetts Bay
Colony. These notes, or 'bills of credit' as they were first termed,
amounting to £40,000, were issued to pay soldiers returning from an
expedition to Quebec. The notes promised eventual redemption in gold
or silver and could immediately be used to pay taxes and were accepted
as legal tender. Just as the war against France in Europe gave rise to the
Bank of England, so just four years earlier the same military necessity
against the same enemy on the other side of the Atlantic gave rise to
America's first governmental issue of notes. Such issues avoided the
higher costs and uncertainties of borrowing and the still greater evil,
especially for American citizens, of taxation. However, it is important
to notice that money creation was given as an explicit reason for issuing
these notes, for the Act authorizing the first Massachusetts issue saw
the bills of credit as a way of overcoming 'the present poverty and
calamities of this country and through scarcity of money the want of
adequate measures of commerce'. Further issues of such notes were
AMERICAN MONETARY DEVELOPMENT SINCE 1700
463
made by Massachusetts, and its example was avidly copied in other
colonies, not simply as a military expedient but to save or at least
postpone the raising of taxes for expenditures in general and in each
case to supplement inadequate supplies of currency. The notes' promise
of future redemption was soon seen as less valuable than cash in hand,
so despite the fact that some of the issues carried the carrot of dividend
or interest payment, most paper issues began to be exchangeable only at
a discount - or, what amounted to the same thing, higher prices were
charged than if payment was made in specie. In Massachusetts by 1712
there were still around £89,000 worth of bills in circulation,
exchangeable at a discount of 30 per cent. By 1726 a Spanish dollar was
worth twenty paper shillings, and by 1750 was worth fifty paper
shillings. Differential inflation was the other side of the coin to
competitive devaluation, and complaints of unfair competition
multiplied, both within the colonies and to London.
The temptation to overissue was far too strong, except for Virginia,
which was a late entrant into this business, and especially Pennsylvania,
which was most circumspect. Maryland, Delaware, New Jersey and
New York were only moderately inflationary, while South Carolina and
especially Rhode Island gave way with such carefree abandon in note
issuing that by 1750 a Spanish dollar passed in Rhode Island for 150
paper shillings and by 1770 its paper money had become practically
worthless. As well as State issues, a number of public 'banks', beginning
again with Massachusetts in 1681, were founded and began issuing bills
and notes to swell the rising tide of paper money. In such early cases the
term 'bank' simply meant the collection or batch of bills of credit issued
for a temporary period. If successful, reissues would lead to a
permanent institution or bank in the more modern sense of the term.
Many of these were 'Land Banks' issuing loans in the form of paper
money secured by mortgages over the property of their borrowers. One
of the best examples was the Pennsylvania Land Bank, which
authorized three series of note issues between 1723 and 1729, the first
issue totalling £45,000 followed by a further two issues each of £30,000.
From this authorized total, individual loans ranging from £12 to £100
were granted on the security of the borrower's land for a term of eight
years at 5 per cent. This bank received the enthusiastic support of the
young Benjamin Franklin who published (on his own press) his
disarmingly 'Modest Enquiry into the Nature and Necessity of a Paper
Currency' (1729). His advocacy did not go unrewarded, for he was then
granted the contract not only for the third issue of the Pennsylvania
Bank but also became the public printer for Delaware, Maryland and
New Jersey. Many years later, when he was in London in 1766, he tried
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AMERICAN MONETARY DEVELOPMENT SINCE 1700
to convince Parliament of the case for a general issue of colonial paper
money. Unfortunately his sensible advocacy was in vain for by that time
Parliament had already been forced to take the opposite course of
action, chiefly because runaway inflation had followed the excessive
issues in a number of colonies, including Massachusetts and especially
Rhode Island.
There were three stages by which the mother Parliament felt itself
progressively constrained by the sound-money men in the colonies as
well as in its own perceived interest to intervene in order first to restrict
and finally to ban completely the issue of colonial paper money. The
first action arose as a result of the quarrel between the supporters of a
new 'Land Bank or Manufactory Scheme' in Boston in 1740 and its
opponents. The proposers, who included 'notorious Debtors', faced the
powerful opposition of the governor of Massachusetts and a number of
prominent Boston merchants who took their case to London.
Parliament ruled in 1741 that the bank was illegal in that it transgressed
the provisions of the Bubble Act of 1720. To clarify this piece of
retrospective legislation Parliament formally extended the Bubble Act to
cover the colonies so that only companies legally authorized could
carry out the specific functions for which such authorization was
originally granted. The second, harsher restriction followed in 1752
when, following a petition from creditors in Rhode Island who had
understandably become alarmed by its sky-rocketing prices, Parliament
forbade all New England colonies from issuing new bills of credit and
insisted that outstanding issues should be promptly redeemed at
maturity. The third and final such prohibition came in 1764 when a
complete ban on issues of legal tender paper - except when needed for
strictly military purposes - was extended to include all the colonies, so
punishing the saints with the sinners, causing widespread hardship and
bitter resentment.
It would, however, be quite wrong to see the paper money
controversy as simply a question of the prodigal colonial son thwarted
by an overstrict, imperious parent. The colonists were themselves
deeply divided, and although the 'frontier versus the north-east' did not
emerge with full clarity until half a century later, yet its blurred outlines
in embryo were discernible in colonial times. Many of the small farmers
in a highly agrarian society, together with the retail shopkeepers and
above all the ever ready speculators, joined forces in a shifting group in
support of easy credit and liberal note issue. Rather than be without
business they eagerly accepted the bills of credit that facilitated their
activities and they greatly benefited from the inflation which lightened
their debt repayments. The virtues of paper money in America's most
AMERICAN MONETARY DEVELOPMENT SINCE 1700
465
inflationary colony were roundly defended by Richard Ward, governor
of Rhode Island, in an official report of 9 January 1740. 'If this colony,'
he wrote 'be in any respect happy and flourishing it is paper money and
a right application of it that hath rendered us so. And that we are in a
flourishing condition is evident from our trade, which is greater in
proportion . . . than that of any Colony in His Majesty's American
dominions' (quoted by Bray Hammond in his most stimulating and
detailed assessment of Banks and Politics in America 1976, 20). Ranged
against such 'irresponsible venturing' was a numerically smaller but
very influential group comprising most of the creditors outside the
issuing agencies, many of the larger farmers, the wholesalers and
merchants who had important trading links with England requiring
sterling payments for imports. Their views are typified by Lieutenant-
Governor Hutchinson of Massachusetts who claimed that 'the great
cause of the paper money evil was democratic government. The
ignorant majority, when unrestrained by a superior class, always sought
to tamper with sound money' (Fite and Reese 1973, 54). Naturally
taking the same stance were most of the influential English creditors
who had by 1776 invested some £800 million in the American colonies.
Not only contemporaries but also economic historians have swung
between the extremes of self-righteous condemnation and complaisant
indulgence in judging colonial monetary experiments. Adam Smith, a
contemporary observer, was fully aware of the benefits of paper money
in stimulating business enterprise in the colonies as in his native
Scotland. 'The colonial governments find it in their interest to supply
the people with such a quantity of paper money as is sufficient and
generally more than sufficient for their domestic business . . . and in
both countries it is not the poverty, but the enterprising and projecting
spirit of the people . . . which has occasioned this redundancy of paper
money' (1776, 423-4). Most classical economists since then up to about
the 1940s or 1950s indiscriminately condemned the colonists'
inflationary proclivities without giving attention to the benefits of
economic growth or to the moderation of colonies like Pennsylvania.
Subsequently, impregnated by Keynesianism, perhaps the sympathy for
the inflationists has been overplayed. More recently the prevalence of
monetarist theory with its obvious similarities with sound-money
classicism pushed the pendulum to the opposite extreme. The rather
limited success of monetarism in practice in the last decades of the
twentieth century should restore a more pragmatic position of balance
between the poles of inflationary easy credit and of growth-inhibiting
sound money: back in fact towards Adam Smith.
The constitutional conflict between Britain and the colonies, between
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AMERICAN MONETARY DEVELOPMENT SINCE 1700
the distant, authoritative centre and the quarrelsome peripheries,
regarding the power to create money and to control banking was
handed down as an unresolved legacy to the post-revolutionary
administration, and has continued down the long years to bedevil the
relationship between the State and federal authorities. Admittedly there
are a number of other reasons, apart from the obvious geographical
ones, rekindling such conflicts. However the fact that ambiguity was
built into the new constitution with regard to the precise but changing
balance of power required to control such a dynamic, mercurial,
mundane yet mighty matter as money was a problem directly carried
over from the late colonial period.
The early colonists were desperately short of currency. Later they
were blessed or cursed with too much self-made money. When
Parliament tried to swing the pendulum right back from quantity to
quality, it found its authority repudiated by revolution. The erstwhile
colonists, forced by freedom to seek their own solution, did not find it
an easy task.
The official dollar and the growth of banking up to the Civil War,
1775-1861
'Continental' debauchery
When the war broke out the monetary brakes were released completely
and the revolution was financed overwhelmingly with an expansionary
flood of paper money far greater than had ever been seen anywhere
previously. Any thoughts of monetary reform, though vastly reinforced
by such experience, had to wait until after the end of the war for their
implementation. Meanwhile the opposite course of financial
debauchery was deliberately chosen, and the American Congress
financed its first war with hyper-inflation. Not that other methods were
not resorted to; but compared with note issuing, all other ways were
very much less effective. Direct requisitioning of goods and services was
used on occasion, but this method suffered literally from rapidly
diminishing, indeed vanishing, returns and alienated, by its arbitrary
imposition, influential sections of the population. Taxation was hated
by the Americans, for that had been a major cause of the revolt against
Britain in the first place. The even higher taxes now being demanded
could be raised only after much discussion and delay, such obstruction
being made worse by the lack of appropriate administrative machinery
for tax, excise and custom collection, and by the fact that the British
army occupied much of the land while the Royal Navy blockaded the
ports. Borrowing was disliked because repayment was generally made
AMERICAN MONETARY DEVELOPMENT SINCE 1700
467
in heavily depreciated notes. In contrast the people had grown
accustomed to the only slightly less obvious form of daylight robbery -
note issuing. Furthermore now was the chance for a uniform national
or 'Continental' note issue such as had long been advocated by
Benjamin Franklin and others. Little wonder that the First Continental
Congress jumped at the opportunity.
The overwhelming reliance on note issuing is shown by the fact that
the central government between 1775 and 1780 itself authorized forty-
two batches or 'banks' of notes totalling $241 million. In addition
(though competing with as much as complementing the 'Continentals')
the States issued their own notes totalling $210 million. Compared with
this paper mountain of $451 million only about $100 million at most
was raised by domestic borrowing, and much of this was paid in
Continental and State notes, so giving a further twist to the inflationary
spiral. Only about 11.5 million of such borrowing was paid in 'real
money', i.e. in specie, mostly in Spanish dollars. Foreign loans totalling
$7.8 million in real money equivalents became available in the later
stages of the war, granted first and most eagerly by France which loaned
$6.4 million or 80 per cent of the total. Spain lent just $174,000 while,
very belatedly, $1.3 million was raised privately on the Amsterdam
capital market.
The faster the Continental and State notes were issued, the faster
they depreciated. Attempts were made repeatedly to hold back the
resultant inflation by means of edicts fixing the prices of essential
commodities, but to little or no effect. By 1781 the value of Continental
notes in terms of specie fell to one-hundredth of their nominal value,
falling later to 1000 to 1. Although the phrase 'not worth a Continental'
has subsequently, with good reason, symbolized utter worthlessness,
nevertheless in the perspective of economic history such notes should be
counted as invaluable as being the only major practical means then
available for successfully financing the revolution. Yet however
necessary such temporary wartime expedients might have been, it
meant that when the founding fathers met to draw up their constitution
they could hardly have been faced with a more chaotic and intractable
monetary situation. The inflationary flood of paper issued during the
war and its greatly uneven distribution afterwards, coupled with a
severe post-war slump in the market values of agricultural products,
sharpened the divisive interests within and between the States. With the
end of the war in 1783 'Continental' issues ceased and five of the States
also refrained from issuing notes. The eight other States carried on
regardless, including Rhode Island where the farmers were again the
main supporters of a 'paper bank' of £100,000 authorized in 1786 to
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AMERICAN MONETARY DEVELOPMENT SINCE 1700
supply long-term loans of up to fourteen years at a bargain rate of 4 per
cent against individual mortgages valued at twice the loan. Most of
such loans were naturally taken up by the farmers who had supported
the bank's foundation against considerable opposition.
As with previous issues the notes were considered by the bank — but
not by the opposers - to be legal tender. Many shopkeepers and
merchants refused to accept them at their face value, and when the
matter was taken to court their refusal was upheld (Myers 1970, 40). Dr
Myers's examples show that Bray Hammond's emphasis on the ultra-
conservatism of farmers and on 'agrarian dislike of paper money' was
excessive (B. Hammond 1967, 35). Similar struggles between debtors
and creditors took place in other States, notoriously 'Shay's Rebellion'
in Massachusetts, also in 1786. Captain Shay led a rebel force of debtors
and other disaffected farmers and ex-soldiers to try and secure debt
relief, issues of paper and other reforms. The rebels were finally
captured by an official army financed by Boston merchants.
The constitution and the currency
Financial chaos had led to violence, and the alarm spread throughout
the country, leading to demands that a national solution should be
urgently sought. The Constitutional Convention which convened in
May 1787, just two months after Shay's Rebellion was put down,
tackled the problem as best it could, its conclusions finally being ratified
in 1789. The essence of their deliberations is contained in three clauses
of article 1 of the Constitution: (a) 'Congress' (not the States) 'shall have
power to coin money, regulate the value thereof and of foreign coin'; (b)
'No State shall coin money, emit bills of credit, make anything but gold
and silver tender in payment of debts'; and (c) Congress is to have 'the
power to lay and collect taxes, duties and excises, and to pay the debts
. . . of the United States'. These three clauses formed the foundation of
the USA's fiscal and financial constitution. At the time their meaning
seemed clear enough, but varying interpretations of these interrelated
clauses by interested parties and unforeseeable changes in monetary
practices led to results far different from those anticipated by the
founders. The drafting and initial implementation of these crucial
financial precepts were in the main the work of three gifted men: Robert
Morris - a Pennsylvanian merchant and banker who had already been
extolled as 'the financier of the Revolution' - Thomas Jefferson and
Alexander Hamilton. We shall look first at coinage and then examine
the interconnections between debt and banking.
Since coins were universally considered to be the only real money it
was felt to be essential to study the subject thoroughly before
AMERICAN MONETARY DEVELOPMENT SINCE 1700
469
formulating the basic currency of the new country. Official monetary
studies and desultory experiments were spread over fourteen years,
beginning with the appointment of Robert Morris to chair a committee
on money and finance in 1778. In 1782 Morris, now promoted to
Superintendent of Finance, published his long-awaited report. After
looking at this, Jefferson presented an amended report to Congress and
as a result the Confederation Congress passed the first, and quickly
aborted, Mint Act of 1786. Its only practical result was the coining of
just a few tons of desperately needed copper coins to replace, among
other shortages, the 1-, 2- and 3-penny paper tickets that New York City
Council had felt forced to issue. It was not until five years later, under
the leadership of Alexander Hamilton, the first Secretary to the
Treasury, that a new report, based on an amalgam of the previous
reports, was presented to Congress and debated with painful slowness.
Eventually, with the direct support of President Washington, the
Coinage Act of 1792 reached the Statute Book.
That Act officially adopted the dollar as the American unit of
account (so confirming Confederate legislation). As we have seen,
among the chronic general scarcity of coins the Spanish dollar was
relatively less scarce and very popular, while refusing to give the pound
its status as the official accounting unit was furthermore a fitting
symbol of independence. Secondly, the Act laid down that the currency
was to be subdivided into cents according to the decimal system - as
advocated, (though in different ways) both by Morris and by Jefferson.
This was put into effect in America 179 years before a similarly simple
practice was adopted by Britain. Thirdly, the dollar was officially to be
bimetallist, being defined as equivalent to 371.25 grains of silver or
24.75 grains of gold. The mint ratio was thus 15:1 - a rate that in
practice was found slightly to overvalue silver. It was Jefferson's advice
that edged the decision towards bimetallism, for reliance on a single
metal would, he said, 'abridge the quantity of circulating medium' and
lead to the continuation of 'the evils of a scanty circulation' (Kirkland
1946, 239). Fourthly, both gold and silver coins were to be unlimited
legal tender, while the minting of copper coins and half-cents as tender
for limited amounts was also authorized. All foreign coins were to lose
their status as legal tender three years after the American coins came
into circulation. Fifthly, a national mint was to be set up with no
seigniorage charges for minting. The mint was built in Philadelphia and
rather significantly was thus the first purpose-built structure authorized
by the United States. It began minting gold, silver and copper coins in
1794. In legal form the USA had established a system that seemed to its
proposers to guarantee a sound and adequate basic money supply.
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AMERICAN MONETARY DEVELOPMENT SINCE 1700
In practice things were vastly different. Because of the slight
overvaluation of silver in the 15:1 mint ratio, it was, after a short while,
mostly silver that was brought to the mint for coining and relatively
little gold. Consequently the shortage of gold coins persisted. An even
greater problem arose with silver because the bright new American
dollars disappeared from circulation almost as soon as they were
minted, being keenly preferred to the older, duller Spanish variety even
though the latter were heavier by 2 per cent. It was thus found to be
profitable to melt down the Spanish dollars, take them to the mint for
coining gratuitously, pocket the profit and repeat the process. At best
this simply would have meant changing the composition of the existing
inadequate money supply instead of increasing it. In fact, since many of
the new dollars were exported to Latin America and elsewhere, the net
position inside the USA was made much worse. The intended removal
of legal tender from foreign coins had therefore urgently to be
suspended. By a presidential proclamation of 22 July 1797 legal tender
was extended indefinitely to 'the Spanish milled dollar and parts
thereof — and in actual practice to most other foreign coins also. By
1806 these and other unanticipated results of the Coinage Act had
become so marked that President Jefferson was forced to suspend all
minting of silver — a suspension that was to last for twenty-eight years.
The shortage of gold coins in America was intensified during the
same period by an external drainage caused not simply by a generally
adverse balance of payments with Britain, but also because the mint
ratios in Europe were more favourable to gold. Thus in 1803 France
established a ratio of 15.5:1, while from 1816 a still more favourable
16:1 existed in Britain. After almost interminable delay the USA in 1834
came into line with the British ratio of 16:1 and so was able to resume
minting its silver coins. In the mean time the USA still had to make do
with a confusing mixture of all sorts of coins, supplemented by various
devices - for instance the paper warrants issued by Ohio State for 5, 10
and 20 dollars, which acted as a currency between 1809 and 1831. It was
not until 1857 that the federal government felt it safe finally to repeal
'all former acts authorising the currency of foreign gold or silver coins,
and declaring the same a legal tender in payment for debts'. By then
metallic money, though still as necessary for retail trade as ever, had
become merely the small change of commerce. In metallic, as in other
forms of money, for most of its first century after independence
America saw the pendulum swing between occasional strong attempts
by the central government to improve the quality of money, and
practical efforts by farmers, businessmen and some of the States to
overcome these restrictions and so increase the quantity of money not
AMERICAN MONETARY DEVELOPMENT SINCE 1700
471
just by trying to get more coins minted but mainly in multiplying its
banks. The silver cloud had a golden lining in that it forced the pace of
progress in banking and so stimulated the economy in general so as
more than to make up for the glaring deficiencies of the formal
currency.
The national debt and the bank wars
Thomas Paine in his pamphlet Common Sense, published in
Pennsylvania in 1776, stated that 'No nation ought to be without a
debt' for 'a national debt is a national bond.' Judged by this criterion
the new States were very much a nation, for debts, bonds and banks
were to climb high on each other's backs in the following decades. The
first 'bank' formed after independence, with Thomas Paine's support,
but mostly because of the lead given by Robert Morris, was the Bank of
Pennsylvania, hastily established in June 1780. It was however little
more than a temporary means of raising funds to pay for the desperate
needs of a practically starving army. Although it had received its charter
(despite doubts about its legality) from the Confederacy it performed
very much like the former colonial 'banks', with none of the functions
of contemporary European banks. Nevertheless as well as coming to
the aid of the army at a critical juncture, its supporters learned from the
experience and were foremost in forming shortly afterwards a more
advanced and more permanent institution, the Bank of North America,
which by a narrow margin of votes was granted a charter by Congress
in 1781 and began operations in Pennsylvania on 1 January 1782.
Notwithstanding continued doubts about Congress's power to grant
bank charters, the new venture proved to be a great commercial success,
providing a range of services to the government and to the public so
that it may in truth be described as the first modern type of bank on the
American continent. Not only did it issue notes but it took deposits
from governments and merchants, transferred funds to a limited degree,
dealt with bills of exchange and granted short-term loans to merchants
(initially of not more than thirty days). Its undoubted success prompted
others to follow its example. The Bank of New York (the oldest existing
US bank) and the Bank of Massachusetts both opened for business in
1784, followed by the Bank of Maryland in 1790. Meanwhile Alexander
Hamilton had become Secretary to the Treasury and set to work to
create order out of the chaos of the national and state debts, to build up
the credit standing of the new government at home and abroad and, a
related task dear to his heart, to set up a major public bank much more
like the Bank of England than the existing banks. In January 1790 he
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AMERICAN MONETARY DEVELOPMENT SINCE 1700
presented to Congress his proposals in a Report on the Public Credit,
followed in December by his Report on a National Bank.
The size of the national debt, as is its nature, grew for some time
after the war had ended, before an efficient peacetime fiscal regime
could be set up, which was obviously a bigger task than usual in the
case of a new nation. The problem was not simply the unpaid interest
which had accrued, but in addition the magnitude of the major portion
of the debt, the domestically owed part, was unclear and depended on
assumptions about what allowances should be made for variations in
the rates of wartime hyper-inflation and a number of other still
unresolved factors as between the States and the Union. Hamilton dealt
first with the comparatively straightforward matter of the foreign debt,
which had risen, with added interest, by 1789 to over $10 million. His
proposal for a complete repayment over a fifteen-year period was
quickly agreed to by Congress and creditors, a move that soon restored
US credit abroad to a high level, assisted partly by the progress of the
French Revolution, which frightened funds away from Europe in general
and France in particular. With regard to the domestic national debt this,
however estimated, represented only the minor portion of the real,
economic costs of the war, which had been in fact borne by the general
public every time anyone had parted with goods or performed services
in return for rapidly depreciating money or money-substitutes. Out of
many millions of such transactions only an unknown proportion still
held written evidence of claims, valued at fancy prices, on their State or
on the Union. The domestic 'national' debt thus consisted of a chaotic
'mass of virtually worthless paper money, loan office certificates, IOUs
signed by the Quartermaster, lottery prizes, certificates given to soldiers
in lieu of pay, Treasury certificates and various evidences of debt'
(Hession and Sardy 1969, 96). Since many of these claims had been
passed on many times at varying rates of discount questions were
naturally raised as to whether only current holders should be repaid,
and at what rate.
Hamilton sensibly decided to allow only existing owners of the old
debt to receive in exchange new specie certificates at the rather
generous rate of 100 to one; a bold but successful move. The most
difficult problem by far to resolve - foreshadowing the endemic fragility
of the Union - was the vital matter of the amounts and rates at which
the Union should assume the debts of the State governments.
Indebtedness varied greatly with a number of the southern States such
as Virginia, having either already repaid much of their debt or having
little to repay in any case, whereas others, mostly in the north, having
large unpaid debts and so having much to gain from the Union's
AMERICAN MONETARY DEVELOPMENT SINCE 1700
473
generosity. Agreement was finally reached when Hamilton granted
Virginia the privilege of being allowed to have Washington, the newly-
designed US capital, built within its territory. Pride was salved and the
national debt had thus become a national bond in both senses of the
word. Hamilton had the foresight to see the advantages to America
which could flow from a reservoir of sound securities, which would help
to mobilize diffused or idle domestic savings and attract foreign
investment, thus stimulating the economic progress of the nation.
Integral to his plans was a National Bank.
In no other country in the history of the world has the subject of
money and banking given rise to such long-sustained, deep-rooted,
widespread, acrimonious, publicly debated and eagerly reported
controversy as in America. Admittedly money everywhere touches so
many people's interests every day that disputes ranging from petty
differences in retail payments up to public policy discussions of the
most major consequences, e.g. regarding high unemployment caused by
high rates of interest or the sharing of monetary power between
Treasuries and central banks, recur from time to time. Supporters of
rival monetary theories then rise to claim much public attention.
Thereafter the rivals normally subside into long periods of peace and
relative obscurity from public gaze. Not so in America, where monetary
quarrels have right from the start been deeply divisive and almost never-
ending. The divisions have run from paupers to presidents, from State
to State, from States to the Union, from North to South, from coast to
frontier, from farmers to manufacturers, from bank to bank, from
politicians to philosophers, and above all from lawyers to lawyers. In
comparison, economists, even when furiously engaged in their not
uncommon pursuit of supporting rival theories, have been far less
acrimonious.
One might have expected the newly independent Americans to have
welcomed with unanimous enthusiasm their freedom to set up their
own banks despite the novelty of such institutions. However, the
experience of the early years of the first true American bank indicated
the alarming extent of opposition to such institutions. Unpaid soldiers
were only with great difficulty prevented from looting the Bank of
North America in June 1783: a government-chartered bank should, it
was thought, see to it that its soldiers were paid. More serious was the
opposition from Pennsylvanian farmers who got their representatives in
the Assembly to debate the legality of the bank's existence. After two
years of bitter wrangling its congressional charter was repealed by an
Act passed on 13 September 1785. Although the bank managed to get a
new charter from Delaware, this, in playing off provincial versus central
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AMERICAN MONETARY DEVELOPMENT SINCE 1700
authority, was merely the first pointer to much bigger things to come, as
was quickly revealed when Hamilton unveiled his ambitious and far-
sighted proposals for the first Bank of the United States. He had five
objectives in mind. First, he wished the new bank to be, right from the
start, much bigger than the three existing banks so that its power could
be wielded quickly and effectively. Secondly, he expected the bank to
stimulate the growth of the economy: in his own words 'to enlarge the
mass of industrious and commercial enterprise'. As well as thus acting
as a commercial bank, his third objective was vital, viz. to act as a
government bank, thereby strengthening the Union. This would help in
his fourth aim, to improve the credit standing of government securities,
and so 'turn the national debt into a national blessing'. Fifthly, by
having a soundly based note issue it would answer the demands for a
much-needed but safe increase in the currency.
Hamilton's proposals were debated with fierce passion in the two
months following the introduction of the bill in December 1791.
Eventually the Senate passed the bill, with an unknown majority, and
the House of Representatives also voted, by thirty-nine to twenty, in its
favour. President Washington asked his Attorney General, Edmund
Randolph, and his Secretary of State, Jefferson, for their advice. Their
view was that the bill was clearly contrary to the Constitution. Their
doubts weighed so heavily with the President that he was about to use
his veto when Hamilton finally persuaded him of its merits. On 25
February 1791 the Bank of the United States received its twenty-year
charter. To signalize its dual nature, its large authorized capital of
$10,000,000 was split so that the national government was to contribute
20 per cent. Of the $8,000,000 to be contributed by the general public
only a quarter needed to be paid for in gold or silver, with the
remaining $6,000,000 payable in government securities. By a sleight of
hand (which in Britain today would lead to either ennoblement or
imprisonment, the dividing line being razor-thin) Hamilton and the
board of the Bank managed to grant the government the means
whereby the government's contribution also was paid in full in
government securities or in its own notes which had been paid to the
government for this purpose. The price of government securities rose
substantially - an intended and welcome result of this wide increase in
demand. The Bank was authorized to issue notes and to begin
operations as soon as just $400,000 had been paid by the public. The
issue was heavily oversubscribed within the first hour of the offer being
opened. The Bank proved to be a great economic success - to the
increasing chagrin of its opponents. Its business with the public and
with the government soon grew too big to be confined to its head office
AMERICAN MONETARY DEVELOPMENT SINCE 1700
475
in Philadelphia, so it opened branches in New York, Boston, Baltimore
and Charleston in 1792, followed later by branches in four other towns.
Its size and success, despite the accompanying cries of 'monopoly', did
not in fact prevent the rise of new banks. From just four banks in 1790
the total number increased to eighteen by 1794, twenty-nine by 1800
and as many as ninety in 1811. Clearly there was a growing market for
new banks to share. A bone of contention more justified than the
complaint of monopoly was the loss by other banks of what they saw as
their deserved share of lucrative and safe government deposits.
According to Professor Myers, around 90 per cent of treasury deposits
were by 1804 being placed in the Bank of the United States. When the
Bank's charter came up for renewal in 1811 its enemies closed in.
The opposition's extreme but yet widely held view was simply that
all banks were evil. Not only did they print paper money which in
American experience was likely to become worthless, but they tempted
yeomen and other reliable citizens to overextend themselves, becoming
forced in the end to sell their lands and property at bankrupt prices to
the banks or to their rich associates, many of whom were foreigners.
The Bank of the United States, though initially owned predominantly
by Americans (who alone could vote), came in time to have a
substantial number of British shareholders. Barings for instance
purchased 2,220 shares from the US government in a single lot in 1802.
By 1811 shares to the value of $7 million were held abroad. Was this not
clear evidence that British imperialism was being re-established by
aristocratic merchant bankers? Eighty worthy citizens of Pittsburgh
made a written protest dated 4 February 1811 that the Bank 'held in
bondage thousands of our citizens who dared not to act according to
their conscience for fear of offending the British stockholders and
Federal directors' (B. Hammond 1967, 213). Apart from such extremes
the most dangerous opposition, again led by Jefferson, came from those
who argued that the Union was exceeding its constitutional powers, for
banking was not mentioned in the Constitution, and silence meant
prohibition rather than the consent that the Federalists were taking for
granted. Supporters of the Bank claimed that the powers expressly
withheld from the States and given to the Union 'to coin money' and 'to
regulate its value' gave the Union the right to charter and control
banking. The States jealously guarded their own right to charter banks
and even to 'emit bills' so long as formal legal tender was not enforced.
The Bank's undoubted success counted little against such dogmatic
beliefs, so that when the renewal of the charter came to be voted on, the
House voted against by just one vote, sixty-five to sixty-four, while the
Senators' votes were tied, seventeen to seventeen. This time the vice-
476
AMERICAN MONETARY DEVELOPMENT SINCE 1700
president cast his veto against renewal. The Bank was killed; but the
case for a government bank and for a federal monetary power remained
so belligerently alive that within five years a second such bank was
born.
Almost as soon as the First Bank of the United States closed its doors
the American financial scene reverted to its familiar inflationary
pattern. The most obvious cause was the outbreak of the war of 1812
but a more deep-seated cause was the mushroom growth of new banks
which issued far too many notes backed by far too little specie, and now
with no government bank to exert a restraining hand. By far the largest
specie deposits had normally been kept in the First Bank of the US. Not
only was this dispersed but some of it had to be sent abroad to redeem
foreign-owned shares. To help finance its rapidly increasing expenditure
the government issued a series of interest-bearing Treasury notes
redeemable after one year but in the mean time accepted by government
departments for official payments. Altogether some $36 million such
bills were issued between 1812 and 1816. To this mass of near-money
was added the note issues of new, mostly small and weak banks, many
of which had very little specie to back such issues. The ninety banks of
1811 had grown to 260 by 1816, while their note issues had increased
from $28 million to $260 million. Even non-bank companies were
issuing notes. According to Jefferson - in his own words 'ever the
enemy of banks' - the actual circulation of paper money in 1814 was
$200 million, and rising, he feared, towards $400 million. Whatever may
have been the total it was plainly grossly excessive. Most paper money
for most of the four-year period was unredeemable into specie; and
although the British invasion could be blamed for the initial cessation
of cash payments, the undisciplined rise in note issuing would have led
inevitably to the same result even had there been no invasion. In such
circumstances sentiment at the end of the war swung back firmly in
favour of a more secure banking system including a Second Bank of the
United States.
The new bank received its twenty-year charter in April 1816 and
began operating from its Philadelphia head office in January 1817.
Apart from being much larger, the Second Bank was very similar in
form and function to those of the First Bank. Thus its $35 million
capital came one-fifth from the government, with specie contributions
from the public equal to at least one-quarter of their contributions,
though the Bank itself patiently assisted its new shareholders to fulfil
this latter condition. Its first heavy responsibility was to help restore the
health of the currency through a general resumption of the
convertibility of the paper notes into cash, a task it carried out within
AMERICAN MONETARY DEVELOPMENT SINCE 1700
477
two years, except that in a few, mostly remote, areas some banks' notes
still remained inconvertible into the 1820s. The most effective method
used by the Bank for restraining the excessive note issues of other
banks, and which had been used to a smaller degree by the First Bank,
was to present, on a regular basis if necessary, such notes to the issuing
banks for payment in specie. This not only forced such banks to
increase their holdings of specie but to refrain from excessive loans in
future; and since note issuing was still the customary method of making
loans, to make lending more difficult. Although the quality of the
currency and of bank lending was thus raised, the potential for
speculative profits by the more adventurous banks was also curtailed,
while a number of small banks were forced into closure, leaving some
communities 'bankless'.
Before turning to assess the forces which eventually swept away the
Second Bank, a brief examination of its positive achievements will help
to provide a balanced picture. It performed well in functioning as a
government bank, receiving deposits and transferring funds on behalf
of the Treasury and other government departments, paying pensions
and dividends on government stock, all such services being free of
charge. It centralized and economized on the use of specie. It soon
established itself as the largest operator in the foreign exchange market
where its growing expertise prevented excessive external drains of specie
and so moderated what would otherwise have been harmful domestic
monetary contractions. It found itself becoming relied upon by other
banks as a convenient and dependable source of specie during
emergencies, thus acting as what would later become known as a lender
of last resort. In day-to-day trading the Bank greatly encouraged
directly and indirectly the market in bankers' 'acceptances', i.e. bills of
exchange were 'accepted' and thereby guaranteed by the Second Bank
and by a few of the other more prestigious banks, on behalf of both
external and domestic traders. The value of acceptances grew almost
tenfold between 1820 and 1833. The Second Bank pursued vigorously
its policy of branching, aiming to set up at least one branch in each
state, with twenty-nine in operation by 1833. By such means the Bank
was able to bring about what was probably its most important and
obvious result so far as the general public was concerned, the provision
of a desperately needed uniform national currency, for its notes were the
only ones to circulate throughout the country at face value.
All other banknotes circulated at a discount, if not locally, then at a
distance from the issuing bank. Not only did the Second Bank thus
furnish a good currency directly, but as we have seen, by presenting
other notes for cash at their parent bank, it improved the quality and
478
AMERICAN MONETARY DEVELOPMENT SINCE 1700
reduced the discount on other paper money. Other notable
improvements in banking were made independently of the national
Bank. The Suffolk Bank of Boston developed from 1824 onwards in co-
operation with six other local banks a system whereby inter-bank
accounts were offset and cleared while each member bank's notes plus
those of a growing number of designated country banks were accepted
at par. In 1829 the New York legislature passed a Safety Fund Act which
became a model for securing greater care in the subsequent chartering
of state banks and contained provisions which foreshadowed later
developments in deposit insurance. While giving all due credit to such
improvements in banking law and custom it was mainly through the
instrumentality of the Second Bank of the US that the foundation of
what could reasonably be called a national system of money and
banking was being established in the USA in the period 1816-34; but it
was doomed to failure following the election of Andrew Jackson to the
presidency in 1828. Resentment of the Second Bank's justified strictness
towards other banks was aggravated, especially during its first seven
years, by considerable laxness in controlling the activities of its own
branches: little wonder, perhaps, for its first president, Captain William
Jones, was a declared bankrupt. Gradually but cumulatively the
hostility of jealous bankers, frustrated borrowers, desperate debtors
and populist politicians built up into what has aptly been called 'the
Bank War', a repetition with heightened intensity and on a larger scale
of previous mixed monetary and constitutional conflicts.
'General Jackson,' said Bray Hammond, 'was an excellent leader in
the revolt of enterprise against the regulation of credit by the Federal
Bank' (1967, 349). Although Jackson never made the Goering-like
remark 'Whenever I hear the word "banker" I reach for my revolver', he
did admit saying at a meeting in November 1829 to Nicholas Biddle, the
cultured third, and last, president of the Second Bank: 'Ever since I read
the history of the South Sea Bubble I have been afraid of banks.' His
fear was of the kind that leads to attack, for he was 'a pugnacious
animal'. Within ten days of his meeting with Biddle, in his first message
to Congress, he questioned the legality, the necessity and the policy of
the Bank. However because of the progress that had been made by the
Bank by 1829, and particularly because of two earlier favourable
decisions by the Supreme Court, Biddle was arrogantly confident that
his Bank would weather the storm. In earlier attacks a dozen States had
tried by various devices to prevent the Bank from operating within their
borders. In the two years 1818-19, Maryland, North Carolina, Ohio,
Tennessee and Kentucky had imposed annual taxes on the Second
Bank's branches ranging from $15,000 in Maryland to $60,000 in
AMERICAN MONETARY DEVELOPMENT SINCE 1700
479
Kentucky. The Bank refused to pay. In 1824 Illinois declared all branches
illegal. Luckily for the Bank these devices were overruled by the
Supreme Court in two celebrated cases which set important
constitutional precedents much wider than just banking — McCulloch v.
Maryland (1819), and Osborn v. the Bank of the United States (1824).
So confident were Biddle and his supporters that in January 1832, four
years before the expiry of the Bank's charter, a bill was introduced to
renew the charter. This successfully passed the House by 167 votes to
eighty-five, and the Senate by twenty-eight votes to twenty.
Jackson promptly vetoed the bill, repeating his objection that the
Bank was unconstitutional, that foreign ownership was excessive and
that the influence of the 'monied oligarchy' was oppressive. The issue
became his rallying call against Henry Clay, the Bank's supporter, in the
1832 presidential election. Jackson's electoral victory was
overwhelming, with 219 electoral votes to Clay's forty-nine. Jackson's
support was widespread and even included influential New Yorkers
jealous of the retention of financial power by Philadelphia, which
contained the Bank's head office. His main fighting support came
predictably from the 'frontier' regions of the South and West. Typifying
this attitude in the West, Senator Thomas Hart Benton of Missouri
declaimed against the Bank that 'All the flourishing cities of the West
are mortgaged to this money power. They are in the jaws of the
Monster' (Kirkland 1946, 144). In the South in 1831 Nicholas Biddle's
hot-headed but short-sighted brother, manager of the Bank's branch in
St Louis, felt forced to defend the Bank's honour by reaching for his
pistol and fighting, at a range of 5 ft, a doubly fatal duel (Galbraith
1975, 80). During 1833 Jackson removed government deposits from the
Second Bank and placed them in State banks - the 'pet banks' as they
came to be known. To protect itself the Bank recalled specie and
deposits from other banks and curtailed its own note issues and in this
way forced other banks to curtail their note issues also. This had a
deflationary effect and further reduced its popularity. Jackson had
killed the Bank, and with it had ruined any hope of a sensibly regulated
banking system, for this would not in fact be re-established for another
eighty years.
A banking free-for-all, 1833-1861
When the Bank of the US existed under Biddle the American banking
scene was beginning to show signs of convergence towards a national
pattern; untidy and incomplete, but at least discernible in outline. With
the ending of the Bank, that emerging pattern broke up into chaotic,
confused and diverging pieces with little if any cohesion and with no
480
AMERICAN MONETARY DEVELOPMENT SINCE 1700
central institution to pull the discordant elements together. Almost any
and every monetary belief, theory or fad, however sound or silly,
positive or negative, was given an airing and put on trial somewhere or
other in the States in this period. It was a free-for-all where some States
tried to prevent the rise not simply of a national bank but of any banks
of any kind and so to do away with paper money altogether. Some
wished to encourage their particular State, despite the apparent
prohibition in the Constitution, to issue notes and to conduct the whole
range of banking as it was then understood. Others wished simply to
see the State, under strict rules and regulations, allow private citizens to
become bankers, while yet others wanted the State to allow anyone,
with the fewest possible limitations, to set up as many banks as they
wished. All these forces pulled and pushed against each other with
varying strength in different States. But all the while there was a rising
tide of money and credit supplied by a motley collection of banking
institutions to meet the increasing demands of a nation where the
population and, with occasional setbacks, the gross national product,
was growing at record pace. Despite this inevitably confused picture, it
becomes possible to give tentative answers to that chicken-and-egg
question concerning the causes of economic development relative to
money: namely, did an initial rise in the supply of credit stimulate the
growth of production, or was the supply of credit simply called into
being by the growth of the real economy?
In general it would probably be true to say that the spectacular
growth of America in earlier as in some later periods took place despite
rather than because of its monetary sector. And yet for much though
not all of this period easy money and credit, though unreliable,
undoubtedly acted especially in the ever-moving frontier regions as an
active spur to growth. It is equally an important part of the truth to say
that if the 'sound' or 'hard' money men of the more settled
communities, such as those that typically supported the Second Bank,
had had their way throughout the country, the average rate of growth
nationally would probably have been considerably reduced. As it
happened, the more settled areas, such as New England, veered towards
sounder money, while as we have noted it was the frontier States (with
some exceptions) that tended to welcome easier money. Given such
conditions, American money was far from being 'neutral' in its effects;
there was an uneven and unfair distribution of gains and losses. The
burdens of bank failures, unpaid loans, highly discounted notes and
bankruptcies fell unequally and arbitrarily on certain unlucky
individuals, while other individuals, especially the entrepreneurs, and
on balance the community as a whole gained. It was after all during this
AMERICAN MONETARY DEVELOPMENT SINCE 1700
481
period, from around 1840 to 1860 that, according to Professor Rostow
(1960), the United States experienced its critically important 'take-off
into self-sustaining growth.
For a brief period before the quarrel regarding rechartering, Jackson
had relied on Biddle in the task, successfully accomplished, of repaying
the national debt. Here the plain, blunt, self-made frontiersman and the
brilliant, erudite aristocrat were in full agreement on this aspect of
financial rectitude. Buoyant revenues plus the saving in having no
national debt to service, together with other hard-money measures led
to substantial government surpluses. Among these measures was
Jackson's 'Specie Circular' of 11 July 1836 which laid down that future
purchases of government land had to be paid in gold or silver, or their
strict equivalent rather than as in previous lax administrations, in local
notes or even in promises to pay. Although the sales of public land never
again achieved the peak of $25 million recorded in 1836, and although
ways of paying by credit were not entirely discontinued, yet for some
time the circular had the desired effect of swelling the government
coffers with specie. In buoyant years the government's surpluses had
become so large as to pose a problem of how to dispose of them. This
was managed in part by distribution to the States, an incentive to
profligacy camouflaged as 'loans', and in part by deposits in the
government's 'pet' banks. By the end of 1836 such deposits had been
placed in as many as ninety-six banks, some of them far too small, too
risky or too unreliable politically to be endowed with such
responsibility. Attempts to relate the amount of government deposit to
the size of the receiving bank's capital proved ineffective.
The logical step for hard-money men in their attempt to divorce the
central government from the banking system altogether was to set up
an independent Treasury, a measure first enacted tentatively in 1840 and
then more definitely in 1846. By means of its central Treasury in
Washington, together with a growing number of sub-treasuries spread
across the country, the Treasury attempted to carry out its own banking
requirements, working towards its ideal as far as possible, of relying
mainly on specie for government payments and receipts. Interestingly it
was at about the same time that the British government was seeking to
separate its responsibilities for sound money from the tentacles of
banking. As we saw in chapter 7, Prime Minister Peel's view of the 1844
Bank Charter Act was that in effect the issuing department was in
Whitehall, leaving the Bank of England free to concentrate on its
banking business in Threadneedle Street. In fact no such separation was
possible. The extreme American solution of abolishing the central bank
left the Treasury to attempt for eighty years to carry out the
482
AMERICAN MONETARY DEVELOPMENT SINCE 1700
increasingly difficult task of being its own banker. In practice it found it
impossible to work purely independently of the banking system.
Meanwhile the States in their various ways tackled or failed to tackle
the problems associated with the surging growth of the commercial
banks.
The death notice of the Second Bank was a green light to the States
to charter their own banks or to encourage their citizens to set up banks
for themselves. A half-hearted attempt by Chief Justice Marshall to
uphold the Constitutional denial of the power of the States 'to emit
bills' was pushed aside and specifically reversed in 1837. A 'Free
Banking' movement sprang up which claimed that citizens had a right
to set up banks rather than being dependent on seeking a privilege
granted by the State. Yielding to such pressures the State of
Massachusetts in 1837 passed an Act allowing any resident the right to
set up a bank with only the very minimum of safeguards.
A more sensible and moderate approach was shown in the Free
Banking Act of New York in 1838 which laid down conditions
regarding capital requirements and the necessity of keeping a reserve of
specie of at least 12.5 per cent behind any note issue. Banks roughly
modelled on these two examples varied from worthless 'wild-catters'
that profited from making quick note issues and then quickly moving
on, to the opposite example of prudently managed institutions.
Bruising experiences with weak and fraudulent banks led nine States
during this period to pass laws - which soon turned out to be quite
ineffective — prohibiting banking of any kind. The virtuous and prudent
banks included most of those in New England that had joined the
Suffolk Clearing Scheme, already mentioned, and which by 1857 had
grown to handle the issues of 500 banks circulating at par. In the South
the Louisiana Bank Law of 1842 required its banks to keep a specie
reserve of at least one-third of the combined total of notes and deposits,
and also laid down useful stipulations regarding adequate liquid assets
to back the remaining liabilities. Thus some large islands of sanity and
security were to be found in the general sea of financial chaos.
The total number of banks more than doubled between 1830 and
1836, rising from 330 to 713. The crisis of 1837 at first merely reduced
the rate of increase, the number reaching 901 in 1840. Then, after
falling to 691 in 1843, the numbers rose again, slowly in the 1840s but
rapidly in the 1850s to reach the pre-Civil War peak of 1,601 in 1861.
These banks, operating under the differing laws of thirty States, varied
enormously in quality, as did the notes by which they were most readily
judged. They poured out a flood of notes most of which were accepted
only at a discount from their face value. Not only every banker but
AMERICAN MONETARY DEVELOPMENT SINCE 1700
483
every trader of any importance had to make constant reference in the
course of his everyday business to one or other of a series of banknote
guides. Thus Hodges Genuine Bank Notes of America, 1859 listed
9,916 notes issued by 1,365 banks, and even then around 200 genuine
banknotes had been omitted. In addition there were, according to the
Nicholas Bank Note Reporter, counterfeit notes of 5,400 different
kinds in circulation, and this despite the best efforts of the banks
themselves, which had set up in 1853 their Association for the
Prevention of Counterfeiting.
The condition of the coinage, starting from a deplorable level,
improved markedly by the end of this period. As already noted, no
silver dollars were minted between 1806 and 1836, while gold coins
tended to disappear through internal hoarding or through export. Thus
much reliance continued to be placed on foreign coins, e.g. the specie
reserve of the Second Bank in 1831 consisted of $9 million in foreign
coin and only $2 million in US coin. By the Coinage Act of 1834,
slightly modified in 1837, the mint ratio of 15:1 established in 1792 was
changed to 16:1. While this encouraged gold to be brought to the mint
it hastened the disappearance of much of the remaining silver in
circulation. Retail trade was badly affected, though relieved to some
extent by certain banks issuing notes of fractions of dollars. By the
Subsidiary Coinage Act of 1853 the silver content of half-dollars,
quarters and dimes was reduced by about 7 per cent, making it no
longer worthwhile selling such coins to the silver metal dealers. The
same Act limited the legal tender of such silver to a maximum of $5;
and in 1857 legal tender could safely and finally be removed from
foreign coins. Thus although the new silver coins now remained in
circulation, their importance had been diminished. After the discovery
of gold in California in 1848 gold came into the mint in great quantities.
Between 1850 and 1860 the mint issued $400 million in gold coins,
around twice as much as had been coined in all its previous history
since 1793. In practice the USA had moved towards a gold standard,
though the move was fought tooth and nail by a growing silver lobby
who struggled to maintain bimetallism for half a century until the law
finally recognized the economic facts at the very end of the century.
The gold discoveries directly stimulated the economies of the frontier
mining areas within an astonishingly short space of time; and indirectly,
more steadily but equally certainly led to a diffused and general
increase in confidence and economic growth by allaying the fears of
even the most conservative of sound-money men in the established
money centres, not only in the USA but also worldwide. In the ten
years following J. W. Marshall's find at Sutter's Mill on 24
484 AMERICAN MONETARY DEVELOPMENT SINCE 1700
Table 9.1 Banking and the growth of the money supply, 1830-1860.
Y&aV
loJU
1 OJU
1 OOU
J opulation
IZ.oDD
1 / -UD7
IT. 1 Q?
31 AA~\
j 1 . nnj
( tnillions)
Number of banks
330
901
824
1562
Pop. /banks
39000
18944
28145
20130
/?/7 i? ?7/~) C \ft7
LJLlrlK^rli.jLCO iprrt
61
107
131
207
Specie $m
33
83
154
253
Deposits $m
21
76
110
254
Money total $m
115
256
395
714
Supply per bead $
9
15
13
23
Sources: Historical
Statistics
of United States,
Colonial Times
to 1957; Fite
and Reese (1973); American Banker's Association, The Story of American
Banking (New York 1963).
January 1848, California produced over $500 million of gold, an
abundance for home and export. Also swollen by Australian discoveries
in 1851, the world's stock of gold available for money increased from
£144 million sterling in 1851 to £376 million in 1861, an increase of 161
per cent (Final Report of the UK Royal Commission on Gold and Silver,
1888, part 1, 10). Given such a substantial increase in the USA and in the
rest of the world, even the sound-money men became expansionist, so
that the developing banking system was able to build up with greater
security than in the previous decades its inverted pyramid of credit,
increasing its banknotes and deposits by an experimental multiple on a
growing and universally acceptable money base. America's ramshackle
financial superstructure was thus, by a fortunate accident of geography,
being supplied in abundance with a growing monetary base of the
highest quality. The salient features of this growth of banking and of the
money supply are indicated in table 9.1.
First one must give a loud and clear warning that, with the exception
of the population figures, pre-Civil War statistics are notoriously
subject to wide margins of doubt and error, and even when they appear
to be reliable their significance is subject to differing interpretations. All
the same, when taken as indications of orders of magnitude they may
usefully provide evidence of significant trends during this critically
important period in American economic history. The population
figures are essential to bring what would otherwise seem astronomical
rates of growth down to earth. Thus the almost fivefold increase in the
number of banks between 1830 and 1860 turns out to be a more
moderate though still significant doubling in per capita terms. To give
AMERICAN MONETARY DEVELOPMENT SINCE 1700
485
an opposite example, the apparently minor 8.5 per cent fall in the
number of banks in the financially dismal 1840s turns out, when
allowance is made for population, to be more like a very substantial 50
per cent reduction per capita. The much criticized increases in note
issues in the same decade, however well deserved from the point of
quality, did not in money supply terms keep pace with the growth of
population.
From the economist's standpoint counterfeit notes and coins, so long
as they are accepted, carry the same power as their legal counterparts.
Legally the counterfeiter is always a malefactor, but economically
speaking he may often be a public benefactor. Given the pressure of
population, one can see why, in the absence of better and above all
adequate money, America's chaotic currency was eagerly pressed into
creative use, and why the large but unknown total of counterfeit notes
and coin were called into being. The figures for specie and deposits are
much less precise than those for notes, but both indicate a strongly
rising trend throughout the period. Bank deposits on which cheques
could be drawn were emerging into use in the larger towns of the north-
east by the 1830s and spread south and west gradually with
urbanization. But there was no separation into time and demand
deposits in aggregate, and it is probable that the 'moneyness' of
deposits was a smaller proportion of total deposits in the early years
before the banking habit had spread. Consequently the deposits
reckoned as part of the money supply have been arbitrarily adjusted
slightly for 1840 and more so for 1830. In case the 'money supply per
head' figures in table 9.1 look incredibly low, it should be pointed out,
first, that this average relates to all the population and not only to
adults; secondly, this static sum makes no reference to the velocity of
circulation; thirdly, the vast majority of people were engaged in
agriculture, and thus were largely self-supporting. Farmers then had
neither the desire nor the opportunity to participate in the kind of
insistent, frenetic weekly or even daily shopping that fuels modern
economies.
Although the money supply grew decade by decade there was a fall
per capita in the 1840s followed by a spectacular rise in the 1850s.
During most of the 1830s the supply of finance, though of shocking
quality, increased faster than population and probably stimulated
demand as a whole. The 1837 crisis was however followed by one of the
worst depressions in American history, lasting until 1843 with only a
very weak and slow recovery. During this period, when the increase in
population is taken into account, the supply of money lagged behind
and was a brake upon effective demand. Thus to answer
486
AMERICAN MONETARY DEVELOPMENT SINCE 1700
chronologically the chicken-and-egg question of the relationship of
money supply to development, the 1830s saw demand lifted upwards by
a rising flood of finance, the cumulative and excessive growth of which
inevitably led to the crisis of 1837. Thereafter and for most of the 1840s
the money supply, contracting in relation to the real needs of an
expanding population, acted as a brake on development. From 1848 for
nine years an enormous increase in gold gave one of the clearest
examples in history of the stimulative power of good-quality money.
Business and especially banking confidence built an excessive super-
structure of credit on this golden foundation, leading in the autumn of
1857 to 'what has been called the first really world-wide crisis in history
... in which all the feverish and gold-dazzled activities of the mid-fifties
ended' (Clapham 1970, II, 226).
Although there were significant differences between the crises of 1837
and 1857, both highlighted the interconnections between the American
and European, especially British, economies and provide an important
reminder that the economic development of the USA was not dependent
solely on its own supplies of money, credit and capital. Some $300
million of new foreign capital flooded into America between 1850 and
1857; while, already by 1853, 58 per cent of States' securities, 46 per
cent of US government securities and 26 per cent of railway bonds were
owned by foreigners (Hession and Sardy 1969, 263-4). As well as thus
supplementing American savings and investment in key areas British
bankers also supplied large amounts of working capital and trade
credit. The closest personal relationships were built up between British
and American merchant banks and commodity traders, such as
Barings, Rothschilds, Brown Shipley, Morgans, and the '3 Ws',
Wilson's, Wiggin's and Wilde's. All these not only helped in the flotation
of American loans but also financed the growing export-import trade,
arranged for the 'acceptance' of large volumes of bills and negotiated
'open credits' of substantial amounts in British banks, including the
Bank of England. Even the Bank of the United States, private and no
longer national, but still the largest bank in the world, turned in the
1837 crisis to the Bank of England for assistance, though Biddle
haughtily laid down conditions the Old Lady could not accept. When
the US Bank crashed in 1841 it failed to repay any of its capital. In
contrast to the long-lasting effects of the 1837 crisis, that of 1857
although perhaps more dramatic did less permanent damage. 'There
was never a more severe crisis nor a more rapid recovery,' wrote the
London Economist of 5 January 1858. Certainly the American
economy was immeasurably stronger than it had been twenty-one years
earlier when every bank was forced to suspend specie payment of notes.
AMERICAN MONETARY DEVELOPMENT SINCE 1700
487
Although 1,415 banks in the US suspended payment in the single month
of October 1857 yet a number of banks in New Orleans, Indiana and
Kentucky maintained their specie payments. One result of the crisis was
to cause more banks to follow their shining but exceptional example of
keeping higher gold reserves. But just as the American economy was
showing strong recovery from that crisis, the looming struggle for
supremacy between the States and the Union, which we have traced
only on the financial side, brutally interrupted the country's resumed
progress with the onset of its bloody Civil War.
From the Civil War to the founding of the 'Fed', 1861-1913
Contrasts in financing the Civil War
Intense political rivalry and fierce financial competition were
inseparably interconnected throughout the half-century from 1861 to
1913, during which the USA finally grew into a world power, which was
achieved without the benefit of central banking. We have noted how
America's citizens decisively rejected the logical steps Biddle was taking
towards a sounder, more disciplined and centralized banking system,
and how instead they favoured laissez-faire run wild. After thirty years
of such chaotic freedom, opinion was slowly swinging back the other
way towards greater discipline and uniformity when the outbreak of
war, as it usually does, forced the pace of change. The war required a
rapid transfer of resources from diffused and decentralized civilian
expenditure to concentrated and centrally controlled military expend-
iture, by means of some combination of taxing, borrowing and printing
money. The mixture actually chosen differed so markedly between the
Unionists and the Confederates as to offer the most instructive - and
apparently clear - lessons of how governments can use and control
money or abuse it and capitulate to inflation.
Among the various estimates of the financial costs of the war, that
given by David Wells, the Special Commissioner of Revenue, in 1869
may be taken as a guide (Myers 1970, 170). Wells estimated the costs
incurred directly by the Union government as $4,171 million, with
directly incurred costs for the Confederates of $2,700 million. A large
remaining sum of $2,323 million, not divided as between North and
South, included such items as pensions, state and local government
debts, and losses to shipping and industry, making a total of $9,194
million. Despite America's ingrained antipathy to direct taxation, the
Union government levied from mid-1861 two types of such taxes. The
first was levied on each of the States in proportion to population rather
than ability to pay, and therefore was felt by the poorer States to be very
488
AMERICAN MONETARY DEVELOPMENT SINCE 1700
unfair. It was paid tardily and reluctantly and was not very productive.
Rather better yields were obtained by a general income tax, the rates on
which ranged from a basic 3 per cent through 5 per cent to an eventual
maximum of 10 per cent on the highest incomes. In all, such direct taxes
yielded less than $200 million. Much more important were the indirect
taxes, levied from the middle of 1862 onwards, with the rates of tax and
the coverage widened from year to year so that they almost became
what today would be called a general expenditure tax, yielding at their
maximum rates a revenue of over one billion dollars. Tariff revenues on
imports were increased by the Morrill Act of 1861, eventually raising
the average rate from 20 per cent to 48 per cent, but because imports
were depressed by the war, total revenue was not very responsive. In any
case since the tariffs were intended partly as protection for domestic
producers, what was lost in revenue was gained in encouraging home-
based manufacturers.
The Northern government's initial attempts at long-term borrowing
by the issue of $500 million twenty-year bonds at 5 per cent were not
very successful until an Ohio banker, a Mr Jay Cooke, was put in
charge of their sale and was given a commission as an incentive. He was
a marketing genius, employed 2,500 agents, advertised widely in local
newspapers and appealed in all sorts of ways directly to the pockets and
patriotism of the public. By mid-1863 the issue was oversubscribed, and
all taken up by the end of the year, mostly by the public, thus
moderating its inflationary impact. During 1863 and 1864 another $900
million bonds of various kinds were issued, again initially at only 5 per
cent. This low rate did not any longer, despite Cooke's best efforts,
appeal to the public, and consequently variations in conversion
conditions and redemption facilities were granted. More significantly,
to ensure the sale of such large amounts of both long- and short-term
debt instruments, the Union had to rely on the assistance of the banks.
It was in this way, through the imperatives of war, that long-needed
changes in the banking system were brought about. The absorption of
government paper, including both notes and bonds, thus became an
integral part of the fundamental reform of the banking system - a topic
which is most conveniently studied after considering the contemporary
but glaringly different fiscal and monetary experience of the
Confederacy.
One similarity for both sides was the early suspension of specie
convertibility for notes. Priority in the use of the nation's supply of gold
and silver was given for government purposes, and the drain of specie
from the banks led to the formal declaration of suspension by Congress
at the end of December 1861. Since one of the main reasons for the war
AMERICAN MONETARY DEVELOPMENT SINCE 1700
489
was opposition to the power of central government, the general
American aversion to taxation was strongly reinforced in the South.
The imposition of adequate taxes and their collection was very much a
case of too little and too late. A tax on property and a progressive
income tax with a top rate of 15 per cent, seemingly more severe than in
the North, in fact yielded so little that payments of taxes in kind, direct
physical requisitioning (or 'impressment') and financial requisitioning
on the States had to be enforced. Though its borrowing policy was
more impressive than its woefully inadequate taxation, yet it still fell far
behind that of the North. The Southern States, relying too
optimistically on Europe's dependence on 'King Cotton', did manage to
use that commodity in attempts to raise loans of $15 million from
Europe, but because of the blockade only around a quarter of the
expected supplies came from such sources. The blockade similarly
reduced the actual yield from the South's increased customs duties to
negligible amounts. Nevertheless up to one-third of Confederate
expenditure was covered by borrowing, including that raised by the
States. As much as it could, the army lived off the land.
The one seemingly unlimited resource was the printing press, which
was resorted to quickly and with great abandon. A flood of notes, some
interest-bearing, others convertible into bonds and yet others promising
redemption in specie 'two years after the ratification of a peace',
answered the most pressing needs of the moment. The first issue of
$100 million was made in August 1861, with later issues bringing the
total up to around $400 million by the end of 1862 and $600 million by
the beginning of 1864. A few futile attempts were made to convert
certain notes to lower denominations but the total continued to rise
until the end of hostilities, reaching by then an estimated $1,555
million. In addition to the Confederate notes, the States, and railway,
insurance and other companies, were also issuing notes. Depending on
how one defines the term, the money stock probably increased by about
eleven times in four years. Estimates of the rise in prices indicate an
increase by about twenty-eight times, from a base of 100 in January
1861 to 2,776 in January 1865. There was obviously a 'flight from
money' with a marked increase in the velocity of circulation, while at
the same time the quantity of goods available for purchase was
drastically reduced. Thus far too much money was ever more rapidly
chasing a diminishing quantity of goods - the perfect recipe for hyper-
inflation.
In comparison the inflation of the North was very mild, with the
estimated index of prices rising from 100 in January 1861 to 216 at the
beginning of 1865. Not only is this mild inflation extremely creditable
490
AMERICAN MONETARY DEVELOPMENT SINCE 1700
when put alongside the infamous record of the South, but it stands up
well in comparison with the experiences of victorious countries in later
wars and is infinitely better than the experience of occupied or defeated
countries in most subsequent wars. Even if the South had resorted
earlier to the imposition of higher taxes, and even if it had managed to
borrow more (though it is difficult to see how this could have been
done), heavy resort to the printing press was inevitable. The lessons to
be gained from the more virtuous policies of the North could have been
applied in the South only had it possessed something more like
equivalent resources. In terms of population, the South with 9 million,
of which 3.5 million were slaves, confronted the richer 22 million of the
North, which possessed over 70 per cent of the country's railway
mileage, nearly 75 per cent of its initial bank deposits and over 80 per
cent of its manufacturing plant, much of which continued to prosper
from the demands of war to a greater extent than did the new industries
encouraged to spring up in the south. Northern agriculture also
prospered. Wheat production was immensely stimulated by British as
well as Northern demand, by the new railways and the Homestead Act
of 1862, which all worked together to increase the prosperity of the
West just when the productive capacity, including that of the railways,
in the South was being severely reduced. The mix of fiscal and financial
policies available for the Union was just not possible for the
Confederacy to put into practice. Thus it could at best have escaped
only to a marginal degree from the hyper-inflation it suffered, and
which led finally to Confederate paper becoming worthless, so
repeating the history of the 'Continentals'. Meanwhile the basic
monetary reforms the whole country needed were being put into effect
in the North.
Establishing the national financial framework
The secession by the anti-federalists opened the way for nationwide
monetary solutions by the Union government. Most urgent was the
immediate granting of purchasing power to the central government by
means of the Legal Tender Act of February 1862 whereby the Treasury
was given the right to issue $150 million 'United States Government
Notes'. A second issue of $150 million was authorized in July 1862, and
a third, also of $150 million, in March 1863. These issues of $450
million, popularly known as 'Greenbacks' from the vivid colour of the
printing on their reverse, formed a fiat currency, specifically not
convertible into specie but authorized as legal tender for all purposes
except the payment of customs duties and interest on government
securities. Furthermore it was generally understood that the greenbacks
AMERICAN MONETARY DEVELOPMENT SINCE 1700
491
were to be a temporary, wartime issue; they were however destined for a
long and controversial life, dividing the nation sharply between the
'Greenbackers' and their opponents. A second type of nationwide paper
money, intended right from the start to be permanent and to replace the
chaotic State banknote issues, came into being as the result of the
Currency Act of 1863, amended and expanded as the National Bank
Act of 1864. Like former 'free banking' Acts passed by New York and
other States, this Federal legislation allowed any group of five or more
persons to set up a bank, with a minimum capital of $50,000 in small
towns with up to 6,000 people, a minimum capital of $200,000 in large
towns of 50,000 people or above, while for the medium-sized towns in
between a capital of $100,000 was required. In order to secure the
privilege of note issue (still thought indispensable for banking) each
bank had to buy government bonds and deposit them with the
Comptroller of the Currency, who had been newly established to
authorize and supervise the national banks. The national banks thus
provided a greatly enlarged market for government stock and supplied
the country, instead of the immensely varied and insecure State
banknotes, with a 'National Bank Note' currency of uniform size and
design (except for the name of the particular national bank), with the
important additional advantage of guaranteed acceptance at par by
every other national bank: a pleasing contrast to the infuriating
discounts commonly charged when State banknotes were used at any
distance from their issuing bank.
To speed up the change to national notes a 2 per cent tax placed on
State bank issues in 1862 was raised to 10 per cent in 1866, so taxing
such notes out of existence. It did not lead to the expected
disappearance of State banks, for these, after declining from their pre-
war peak in 1861 of 1,601 to their lowest post-war number of 247 in
1868, rose stubbornly thereafter to ensure that the USA continued to
enjoy or suffer the distinction of its 'dual banking' structure. Actually
the term 'dual' is bland and misleading, for it implies that the United
States operates only two kinds of banking jurisdiction instead of more
than fifty confusing varieties actually or potentially existing. In the
United States, the textbook home of laissez-faire, even the term 'free
banking' is subject to fifty limiting interpretations, for it is freedom to
operate under fifty potentially widely differing sets of restrictions. It
was just in this period when the chaotic banknotes had at last been
replaced by uniform notes that bank deposits transferable by cheque
grew to become the main currency for business. Already by 1890 over 90
per cent in value terms of all transactions were carried out by cheque.
The supply of the main and growing source of money thus became
492
AMERICAN MONETARY DEVELOPMENT SINCE 1700
subject not to uniform rules, controls and supervision but to a large
number of different authorities using varying and sometimes conflicting
guidelines with widely contrasting degrees of strictness or laxity. Even
the 'national', federally chartered banks could not in fact operate
uniformly but were subject to different constraints in different States,
notably for example in such a vitally important matter as whether they
could open branches. Thus national banks in Illinois or Texas have not
operated in the same way as their neighbouring national banks in Iowa
or Louisiana, to say nothing of the much greater differences from the
national banks in California or New York and the still greater contrasts
with their State counterparts. In this way the so-called dual system
divides even the apparently uniform national banking system into a
number of starkly different varieties. This peculiar dual banking system
is thus in part connected causally with another distinctively American
feature, namely the persistence of a high degree of unit banking
throughout the nineteenth and twentieth centuries. This and other
related factors such as the high incidence of bank failures will be
examined later; but first we trace the remarkable growth in the number
of banks in the USA up to the peak year of 1921 - remarkable because,
in glaring contrast, bank numbers in other advanced countries were
falling steeply during the same period (see table 9.2).
Reference to table 9.2 shows that the total number of banks increased
by over nineteen times between 1860 and 1921 to reach a peak of nearly
30,000. The vigour of State banks is shown by their staggering eighty-
eight times increase from 1868, rising through equality of numbers with
national banks in 1892 to their high point of 21,638, or 73 per cent of
the total number of banks in 1921. Typically, however, State banks were
significantly smaller on average, so that their proportion of total
deposits has generally varied between one-third and a half. State banks
more than trebled in number in just fifteen years between 1900 and
1915, rising from 5,000 to over 18,000, during a period of intense
competition with their national rivals, which though not growing so
fast yet managed to double their numbers from 3,731 to 7,589. In order
to enable the national banks to compete more directly at the small-town
level, the Currency Act of 1900 reduced the capital requirement for
banks in towns with a population of less than 3,000 from the previous
minimum of $50,000 to $25,000.
This competition in weakness is another instance of the debilitating
effect of the dual system, dragging national standards downwards.
Naturally the State banks enjoyed a number of perceived offsetting
advantages to put before their shareowners and customers, otherwise
they could never have grown so fast or have persisted so long as they
AMERICAN MONETARY DEVELOPMENT SINCE 1700 493
Table 9.2 State and national banks, 1860-1992.
State banks National banks
Year
1 ota i
/o
/o
1 Q^n
lobU
IjbZ
IjbZ
1UU
nil
mi
1 Q£S
1 £A3
2AQ
9 1
Zl
1 9QA
1Z74
7Q
/7
1 £££
lobo
1 QQ7
loo/
947
1 ^zin.
Q7
o/
1 Q7fl
lo/U
1.70/
39 ^
jZj
1 7
1 /C1 9
ib iz
Q3
OJ
1
1 o / J
9 ££9
Job
99
zz
ZU/b
7Q
/ o
looU
979£
Z/Zb
djU
9A
ZH-
9H7^
ZU/b
7£
/b
Iooj
3/U4
1 ni c
97
Z/
Z607
73.
/J
1890
5734
2250
39
3484
61
1 8Q9
loVZ
7C39
/jjZ
j/jj
jU
37CQ
jU
1 QCK
lo"J
oUo4
A3£Q
^A
371 ^
J/ lJ
4b
1 Qnn
5/ jo
jUU/
^7
3731
1 A£Q9
7UI0
£1
bl
C^^A
Jbb^f
3Q
jy
iy iu
9 1 AQ/C
1 A3AQ
b/
71 3Q
33
1 Q1 C
17 X J
9 CQ7C
Zjo/ J
1 Q997
loZZ/
71
/ 970
9Q
zy
1 Q91
iyzi
Zy/oo
91 £3Q
73
Q1
oljf
97
Z/
1 Q9Q
17 Ly
9^113
Zj 1 1 j
1 7^G3
7fl
/U
/ JJU
3fl
1935
154/0
10053
65
C /1 1 c
5425
35
1955
13719
9027
66
4692
34
1975
14570
9838
68
4732
32
1980
14836
10411
70
4425
30
1989
12912
8636
67
4276
33
1990
12572
8458
67
4114
33
1991
12384
8368
68
4016
32
1992
12050
8175
68
3875
32
Sources: Board of Governors of the Federal Reserve System; Annual Statistical
Digests and Federal Reserve Bulletins.
have. State banks have outnumbered national banks for a hundred
years, and by about two to one throughout almost the whole of the
twentieth century, remaining in its closing decade a most vigorous
apparent anachronism. There are a number of strong reasons for their
stubborn survival, not all of them good. Their generally much smaller
initial capital requirements enabled them to capture a large market
share among the small country towns and to grow with the growth of
these towns: hence their particular appeal in the States of the Midwest.
State banks have also for most of their existence been required to hold
much smaller reserves. Ten States, even as late as 1910, stipulated no
reserve requirements at all. Supervision of State banks was generally
less onerous, and examinations less frequent, than was the case with
494
AMERICAN MONETARY DEVELOPMENT SINCE 1700
national banks. State banks were able to carry out a wider range of
bank-related services, many of which were specifically forbidden for
national banks, including the important practice of being able to lend
on the security of real estate. State-chartered banks were generally felt
to be more flexible in responding to local demands. Fewer costly
restraints, combined with these other advantages, gave them the ability
to operate at a size so small as to be forbidden to or unprofitable for the
national banks. The prohibition of branching and the legal bias against
bank mergers preserved the small unit bank and prevented the generally
larger national banks from being able to take over their smaller rivals or
to compete with them as effectively as would have been the case in a free
market. National banks were not generally allowed to purchase the
stock of other banks whereas most State banks could do so. Similarly
while national banks were not allowed (at least until 1906) to lend to
any one borrower an amount exceeding 10 per cent of their capital,
State banks were usually free from such constraints, which otherwise
would have impinged most heavily on the smaller banks.
While banks and their money-creating powers thus grew in a fast but
haphazard manner, the attention of the public was mainly turned to
other aspects of money. The essence of the great 'money question'
which dominated the waking thoughts and actions of the politicians
between the Civil War and the end of the century was not so much a
concern about the silent financial revolution brought about by abstract
bank deposits but rather with the much more concrete, highly visible
and emotionally explosive matters of gold and silver and the
convertibility of notes into one or both of these metals.
Bimetallism 's final fling
The United States and France played the leading roles in trying to
establish international agreement on bimetallic monetary systems in
the latter part of the nineteenth century, during which the world was
awash with monetary remedies for economic instability. It was realized
that external drains of either gold or silver could create strains so strong
that any single country might find it impossible to maintain its
bimetallic system, but that if the major countries could all agree on the
same mint ratios then the supposed advantages conferred by
bimetallism would more easily be maintained. Among these advantages
were first, the securing of a less restrictive money supply than would be
the case were only one metal (in practice the much rarer gold) chosen as
standard and, also that by having paper money anchored firmly to a
combined metallic base, inflation would be avoided. Bimetallism thus
seemed the best bet for stability. France widened its influence in 1865 by
AMERICAN MONETARY DEVELOPMENT SINCE 1700
495
establishing the Latin Union with Belgium, Switzerland and Italy (with
Greece joining in 1868). These countries agreed a common 15Vi:l
silver/gold ratio, and that the gold and silver coins of each country were
to be accepted by all. In 1867 an International Monetary Conference
was held in Paris, to which the USA sent representatives, where attempts
were made to widen still further the area of common currencies based
on the French gold and silver 10- and 5-franc pieces. By then the world
was moving strongly towards a preference for a British-type gold
standard, a model which the newly united Germany adopted in 1871,
followed by Austria, Holland, Scandinavia and Russia. A further such
conference was held in Paris in 1878, greatly reviving, through wishful
thinking, the hopes of US bimetallists, but otherwise falling flat. The
Bank of England had refused to send representatives to either
conference: the Old Lady considered them to be both too political and
too theoretical — a shrewd but correct interpretation. Vast increases in
world supplies, first of silver, then of gold, unsettled even the Latin
Union's bimetallic stance. In 1879 France had to discontinue its silver
coinage, and only gold coins were universally accepted in practice in the
Union, which thereafter could manage only a 'limping bimetallism',
with silver as its broken leg. Theoretical variants of bimetallism rose -
and fell without trace. Such was the 'Parallel Standard' where mint
ratios were to be adjusted frequently whenever significant changes in
market ratios of gold and silver demanded such changes (but this left
the problem of the value of existing coins unsolved). The so-called
'Great Depression' of 1873—86 had caused the monetary authorities
even in Great Britain to question the merits of the gold standard and
ask the advice of its Gold and Silver Commission of 1886 as to how best
to overcome the fall in prices. Two of the most famous economists of
that period, Alfred Marshall and F. Y. Edgeworth, advocated
'Symmetallism', where the legal standard unit would consist of a fixed
weight of both silver and gold, 'a linked bar on which a paper currency
may be based' (Edgeworth 1895, 442, quoted in Friedman 1990, 95). On
the analogy of a clock's compensating pendulum their combined values
would vary less than that of either silver or gold - correct but
impractical. It is against this international background, battling
valiantly but vainly against the tide, that America's 'blundering
enrapturement' with bimetallism as part of its great money question
has to be judged (Nugent, 1968).
From 1865 to 1873 opinion in the USA moved strongly against silver
and towards gold as the dollar standard, but suddenly from 1873 to
1896 bimetallism surged into a crusade. Supporters of the gold
standard were mostly concentrated in the established cities of the
496
AMERICAN MONETARY DEVELOPMENT SINCE 1700
north-east. They wished to reduce the inflationary dangers of excessive
note issues by taking measures which would lead to full gold specie
convertibility for greenbacks and national banknote issues. Silver's
supporters were to be found mainly in the West and South where the
silver miners easily gained the backing of the rural communities.
During much of the second half of the nineteenth century prices in
general tended to fall, while agricultural prices and farmers' incomes
(because of the inelasticity of demand for their products) fell even
farther. At the same time the newly formed States of these western and
southern areas were each bringing their two representatives to
Congress, so giving the silver lobby a political influence much greater
than their population justified. At the end of the Civil War the
greenback circulation of $450 million was worth only half as much in
gold as in nominal value. Consequently the hard-money men wished to
see a quick reduction in such note issues (which after all had been
intended only as a temporary wartime expedient). By the Contraction
Act of 1865 they persuaded the government to begin withdrawing the
greenbacks at a rate of $10 million a month. Unfortunately these
reductions coincided with, and reinforced, a general depression, so that
the government was forced to halt further note withdrawals in 1868,
and in the following years even began making some increases in
greenback circulation. A Greenback Party was formed in 1875, and by
1878 had managed to attract a million voters and returned fourteen
members to Congress determined to secure at least the maintenance
and preferably an increase in the greenback note circulation. A
compromise between the opposing factions resulted in the fixing of the
greenback circulation in 1878 at the then current amount of
$346,681,016. The trend towards scarcer and dearer money was thus
halted.
Around the same time two further aspects of the money question
were being resolved, namely the demonetization of silver and the
resumption of convertibility into specie, the specie concerned being
gold. By the Coinage Act of 1873, passed while the silver lobby was
sleeping, the silver dollar ceased to be the standard of value: the USA
was now virtually on the gold standard. The gold premium carried by
notes was clearly falling during the early 1870s, so that the government
felt it safe, by the Resumption Act of January 1875, to promise full
redemption by 1 January 1879. One of the factors strengthening the
value of the greenbacks and so making resumption easier was the case
of Knox v. Lee of May 1871 by which the legal tender quality of the
greenbacks, which had previously been drawn into question, was
widened and confirmed. The restrictions on note issue, the fall in
AMERICAN MONETARY DEVELOPMENT SINCE 1700
497
prices, the legal confirmation of greenback status and an increase in
world gold supplies all helped to make resumption completely
successful. But a further feature, insufficiently stressed before the
monumental researches of Friedman and Schwartz, was the greatly
increased output of goods and services achieved despite the depression
in prices. America simply grew up to its money supply (Friedman and
Schwartz 1963, 41-4).
By the time convertibility had been resumed a 'free silver' movement
had suddenly awoken and bestirred itself into furious activity. This
movement claimed the right to bring unlimited amounts of silver to the
mint for coining, thus keeping up prices in general and of course silver
prices in particular. The silver lobby's first success in undoing what had
belatedly come to be called the 'crime of 73' was registered in the
Bland-Allison Act of 1878 whereby the Treasury was obliged to buy
between $2 million and $4 million of silver each month to be coined at
the 16:1 ratio. Still better, the Treasury agreed to purchase a fixed
amount of 4.5 million ounces each month according to the Sherman
Silver Purchase Act of 1890. This situation could not last long for, as
every student of economics soon learns, monopoly power does not
bestow the ability to fix both price and quantity; and although the
government had not promised to buy unlimited amounts, and although
the American silver miners were not alone in the world, yet the
government did purchase an enormous amount of over $500 million of
silver between 1878 and 1893. The abundance of silver on the world
markets meant that gold could be purchased in the USA at favourable
rates, so that there soon ensued both an internal and an external drain
on the US gold reserves. This grew so severe as to bring them by 1893
below the level of $100 million considered to be the minimum to
guarantee the convertibility of an enlarged note circulation; for
although the greenback circulation had been fixed, the Resumption Act
had in 1875 removed the $300 million limit on national bank note
circulation. The gold drain therefore forced President Cleveland,
despite fierce opposition, to cancel the silver purchase laws as from 1
November 1893. Gradually, with the aid of the merchant banking house
of Morgan (there being no central bank), the gold reserves were again
restored so as to maintain convertibility. However, Cleveland paid the
price by being rejected by the Democratic Party in favour of someone
who, more than anyone else in history, has come to embody the
bimetallist cause, William Jennings Bryan (1860-1925).
Bryan trained and practised as a lawyer; but he was also a gifted
journalist and publicist, a brilliant and tireless orator and political
organizer who stimulated, bullied, cajoled, inspired and unified all the
498
AMERICAN MONETARY DEVELOPMENT SINCE 1700
disparate factions that shared some interest in the silver question into
fighting single-mindedly for the bimetallist cause. Among such factions
were the Populists or People's Party, formed in 1891 but already num-
bering a million members by 1896. They advocated mildly socialistic
policies, e.g. government ownership of the communication industries,
postal savings banks, etc.; but being strongly in favour of unlimited
silver coinage they were natural allies of Bryan. The American
Bimetallic League and the National Bimetallic Union similarly
combined to fight for Bryan in his bid for the Presidency in 1896.
During this campaign in one of the first 'whistle-stop tours' Bryan
made a political convenience of the newly expanded railway system,
travelled over 18,000 miles in thirty-seven States and made some 600
speeches, culminating in the Democratic National Convention in
Chicago where he repeated his rallying cry against the stultifying
restrictions of the gold standard: 'You shall not press down upon the
brow of labour this crown of thorns, you shall not crucify mankind
upon a cross of gold.'
Yet for all Bryan's brilliant oratory and energetic campaigning it was
his more realistic opponent, the Republicans' William McKinley, who
won the election, by 271 votes to Bryan's 176. All the same, so
frightened had McKinley's supporters been made by the rhetoric of the
bimetallists that they hedged their bets, favouring America's
continuance on the gold standard only until such time as the major
trading nations would agree to coin gold and silver at the same fixed
ratio — an event which naturally never occurred. In retrospect it is easy
to criticize Bryan. Yet during the first part of the 1890s, as we have seen,
America was losing gold; and Bryan could hardly be blamed for not
seeing the immense increase in world gold supplies that were already
beginning and which were to grow into a flood in the next decade or so.
The annual world output of gold rose from 5,749,306 ounces in 1890 to
12,315,135 ounces in 1900. The USA, which had been a net exporter of
gold to the extent of $79 million in the year from mid-1895, became,
thanks to running a favourable balance of trade, a net importer of $201
million of gold altogether in the next three years. This, together with its
retained portion of domestic production, caused total US monetary
gold stocks to rise from $502 million in 1896 to $859 million in 1899
(Friedman and Schwartz 1963, 141). World gold supplies continued to
grow in the next decade and a half. This enormous increase came in
part from new discoveries in Alaska, Africa and Australia, and in part
from the invention of the cyanide process which made extraction from
low-grade ores profitable. Together these gold supplies helped to
stimulate the world economy and led to a doubling of America's
AMERICAN MONETARY DEVELOPMENT SINCE 1700
499
monetary gold stock from 1890 to 1900 (and a trebling between the
earlier date and 1914). This was the economic reality that moved the
balance of opinion decisively away from bimetallism and led at last to
the confident enactment of the Gold Standard Act of March 1900: gold
monometallism had, belatedly, legally captured what was to be its most
powerful convert.
From gold standard to central bank(s), 1900—1913
That Act, as well as unequivocally confirming in legal terms the already
established economic fact that the dollar was defined in terms of gold
alone, contained a number of other provisions which had a considerable
effect in expanding the basic money supply - and hence is also known
as the Currency Act. The first of these was the increase of the minimum
gold reserve which the Treasury had to hold to maintain the
convertibility of greenbacks, Treasury notes and the national banknotes
from $100 million to $150 million, thus substantially raising public
confidence in the government's ability and determination to maintain
the gold standard, and the convertibility of notes, which latter for most
people symbolized that standard. Secondly, as already noted, the
minimum capital for the smallest national banks was halved to $25,000,
so stimulating not only a rapid increase in their numbers but also
leading to a much-needed increase in national banknote circulation.
Thirdly, and still more important in this connection, was the raising of
the limit on a bank's note issue from the previous 90 per cent to 100 per
cent of the value of the required backing of government securities
deposited with the Comptroller of the Currency, though the valuation
was still reckoned on the lower of either the market price or the par
value of such securities. Although, in terms of quantity, bank deposits
were by far the most important part of the money supply, yet in times of
crisis and more commonly in rural areas and in retail trade the greater
liquidity of cash was preferred. It was hoped that the increased note
issues encouraged by the Act of 1900 would answer the insistent
demands for a more 'elastic' currency. When the greenback circulation
had been fixed at a maximum of $357 million in 1878 it had been
expected that the national banknote circulation, which, as we saw, had
already had its previous ceiling of $300 million completely removed in
1875, would rise in line with the demands of a rapidly growing
economy.
Unfortunately it was not the needs of the economy but rather the
state of the government's own finances that governed note supply; a
continuously increasing deficit would have been required to provide a
sufficiently cheap supply of government securities to make it profitable
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for the banks to increase their note issues. In fact the opposite tendency
towards fiscal surpluses prevailed. Thus, after a slight rise to $352
million in 1882, the circulation of national banknotes fell drastically by
54 per cent to only $162 million in 1891. In 1898 they had risen, but
insufficiently, to $221 million. The influence of the Currency Act
thereafter becomes apparent, for the circulation rose to $349 million in
1901, just exceeding that of the greenbacks, to reach $598 million in the
crisis year of 1907 and then continued to rise to reach a pre-war peak of
$745 million in 1913. These developments alleviated but did not solve
the clamorous need for an 'elastic currency' for the simple and
increasingly apparent reason that the key ingredient to be flexibly
controlled in line with the needs of the economy was not the gold or the
notes which had been dominating public discussion, but rather bank
credit. Following the severe bank panics of 1873 and 1893 this lesson
was finally underlined with unmistakable clarity by the crisis of 1907,
which demonstrated that just being on the gold standard was no
guarantee of either monetary stability or of the safety of the banking
system.
The chief financial factors responsible for the recurring instabilities
of the national banking era (apart from those severe fluctuations in the
real economy for which the banking system could not directly be
blamed) were, first, the pyramiding of deposits, and secondly, the
absence of an effective lender of last resort, i.e. a central bank. Small
country banks naturally found it convenient, indeed essential, to keep
part of their total deposits with a larger 'correspondent' bank in
(usually) the nearest large town; and banks in such towns similarly kept
a larger amount with their correspondent bank(s) in the big cities,
especially New York, Chicago and St Louis. These arrangements were
codified into law by the National Banking Acts of 1863-4, with country
banks having to keep reserves of 15 per cent of their deposits (plus,
originally, notes), while the forty-seven reserve cities and three central
reserve cities, whose bankers acted as bankers to the country banks, had
to keep a higher reserve, of 25 per cent. Whenever banks throughout the
country, for example at seed-time and harvest, found it necessary to
draw more heavily than usual on their deposits from their
correspondent banks in the reserve cities, these latter banks were forced
to sell securities and call in their loans to brokers, thus leading to high
money market rates and falling security prices, so as frequently to cause
severe stringency, and in the extreme cases runs on banks and thus
general financial panic.
It was at such times that the lack of an efficient lender of last resort -
able and willing to supply sufficient liquidity promptly enough to quell
AMERICAN MONETARY DEVELOPMENT SINCE 1700
501
the crisis in its early stages — was keenly felt. Instead, the domino effect
turned local difficulties into widespread panics with bank failures being
far too common. To some extent certain alleviating measures were
taken from time to time by local bank clearing houses and also, though
more rarely, by the wealthy Treasury, whenever it decided to reverse its
'independent' stance. (A most useful summary of both kinds of such
measures is given by Ellis Tallman 1988.) In particular, members of
bank clearing houses would issue and accept among themselves
'clearing house certificates' for settling inter-indebtedness, leaving the
precious notes and gold more exclusively available for their more fearful
and impatient retail and personal customers. Thus during the height of
the 1893 crisis 95 per cent of all clearings in value in New York were
settled with clearing house certificates. As for the Treasury's tentative
central banking activities, these became most prominent when Mr
Leslie M. Shaw was Secretary of the Treasury, from 1902 to 1906; in the
latter year, with pardonable exaggeration but with little foresight, he
claimed that 'No central or government bank in the world can so
readily influence financial conditions throughout the world as can the
Secretary' (Friedman and Schwartz 1963 150). However, as the events of
the following year were to prove, such sporadic and patchy actions were
far from being the proper way to run the banking system of what had
now grown to be the world's largest economy.
Whereas previous crises had usually started in the weak country
banking regions and had spread via the reserve deposit system to
involve the sounder, bigger banks of New York, the 1907 crisis started
within New York itself led in particular by the powerful and
fashionable trust companies. The trust companies could carry out
financial services denied to the commercial banks, were less keenly
supervised and could operate with lower reserves. Unfortunately, partly
for that reason, they were not members of the New York Clearing
House which otherwise might have saved them by prompter action
when the 1907 crisis broke. The trusts were important customers both
of the large New York commercial banks that held most of the reserves
of the nation's banks and of the merchant and investment banks like
J. P. Morgan, Jay Cooke and Kuhn Loebe, the whole nexus forming
together the heart of the country's famed and feared 'money trust'. It
was the hidden danger of this money trust, purported to be the
strongest part of the country's financial system, that was cruelly
exposed by the 1907 crisis and the lengthy public investigations that
followed.
As the country's banking system had grown, so had the extent of
concentration of reserves in New York City, both in absolute and
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relative terms. Thus whereas in 1870 some 40 per cent of all national
bank reserves were held there, by 1900 three-quarters of the very much
larger total of reserve deposits of all the country's correspondent banks
were held by the six largest New York City banks. Much of this money
was, either directly or indirectly via brokers and investment trusts,
invested in the stock market, prices on which could of course be very
volatile. To deal with the growing scale of investment business the
competing brokers combined to form the New York Stock Exchange in
Wall Street in 1896. Only twenty industrial companies were quoted on
this exchange in 1898 but by 1905 eighty-five were listed. A company
merger mania in the early 1900s stimulated by professional promoters
like Charles R. Flint, the 'father of the trusts', caused a boom in the
investment trust movement that sucked in these rapidly growing bank
deposits. Thus John Moody in The Truth about the Trusts shows a
growth from ninety-eight trusts with a capital value of one billion
dollars in 1898 to 234 trusts with a total capital of six billion dollars in
1904. This euphoria lasted until 1907.
The crisis began when five New York banks were forced to seek
assistance from their clearing house on 14 October. This at first seemed
to quell the trouble, but a week later the country's third largest trust,
the Knickerbocker Trust, failed, followed shortly after by the second
largest, the Trust Company of America and another large trust. Despite
the issue of Clearing House Certificates, the deposit of $36 million by
the Treasury in the New York banks and a frantic effort by J. P. Morgan
to mount what we today would call a 'lifeboat' rescue, a general
banking panic spread rapidly throughout the country. This mainly took
the form of a restriction of cash payments, which lasted in many areas
until January 1908. In the two years 1907-8 some 246 banks failed,
much fewer than in the previous panic of 1893. The restrictions on
convertibility rationed the existing gold reserves and thus had the effect
of inhibiting the runs on banks from producing the larger number of
failures that would otherwise have taken place. The Knickerbocker
Trust itself reopened in March 1908. In fact the rise of new banks soon
exceeded the number of failures, so (as seen in table 9.2) the total
annual number of banks continued to grow. Nevertheless the long
period of inconvertibility coupled with the painfully telling fact that the
crisis had first arisen, not among the small, weak, country banks, but
among the country's largest financial institutions right in the central
reserve city of New York, led to a ready acceptance by all sections of
business and political opinion of the urgent need for a fundamental
reform of the banking system.
The first major step towards an 'elastic currency' was taken when
AMERICAN MONETARY DEVELOPMENT SINCE 1700
503
Congress passed the Aldrich-Vreeland Act in May 1908. It enabled, as
an emergency measure, groups of a minimum of ten national banks to
form National Currency Associations to issue temporary currency up
to a maximum for the country as a whole of $500 million. Secondly, the
Act set up a National Monetary Commission of nine Representatives
and nine Senators including Nelson W. Aldrich as Chairman. This
Commission authorized some forty-two separate reports, which were
published in twenty-four volumes, most of which contained studies of
foreign banking systems. In all, they constituted the most
comprehensive investigation of money and banking seen up to then in
history. It took five years for Congress to digest the information
sufficiently to come to its decisions. In the mean time two other relevant
aspects require a brief mention. First, in 1911 the US Postal Savings
System was established, thus apparently answering the demands the
Populist Party had made in the 1890s; but the opposition of the
commercial bankers saw to it that the rates of interest the postal banks
were allowed to give prevented them from ever becoming really serious
competitors. Secondly, in February 1912 a committee under the
chairmanship of Arsene Pujo of Louisiana was set up to investigate the
extent of the powers of the alleged 'money trust'.
The Pujo Committee reported in 1913 that it had 'no hesitation in
asserting that an established and well-defined identity of interest . . .
held together by stock-holdings, inter-locking directorates and other
forms of dominion over banks, trusts, railroads' etc. 'has resulted in a
vast and growing concentration and control of money and credit in the
hands of a comparatively few men'. The oft-repeated warnings of
William Jennings Bryan, now the newly appointed Secretary of State,
had been amply vindicated. The days of laissez-faire, particularly for
New York money men, were over and some form of central banking
control inescapable and imminent. In introducing the bill for banking
reform Senator Carter Glass stated plainly that 'Financial textbook
writers in Europe have characterised our banking as "barbarous" and
eminent bankers in this country have not hesitated to confess that the
criticism is merited.' The Act establishing the Federal Reserve System
was eventually signed by President Woodrow Wilson on 23 December
1913, its declared objects being 'to provide for the establishment of
Federal reserve banks, to furnish an elastic currency, to afford means of
re-discounting commercial paper, to establish a more effective
supervision of banking, and for other purposes': almost a blank cheque
to be filled in as circumstances demanded. The President, in the course
of the debate, added: ' We shall deal with our economic system as it is
and as it may be modified, not as it might be if we had a clean sheet of
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paper to write upon; and step by step we shall make it what it should
be.' That journey has no end, for like the liberty with which it is so
closely related, the price of sound money is eternal vigilance.
The banks through boom and slump, 1914—1944
The 'Ted' finds its feet, 1914-1928
Before the buildings of the new Federal Reserve System were completed
and staffed, the outbreak of the First World War in Europe in August
1914 caused such a large sale of US securities and a drain of gold that
the US authorities were forced, for the first and only time, to make use
of the emergency facilities of the Aldrich— Vreeland Act for National
Currency Associations to issue temporary notes, some $380 million of
which were put into circulation. This turned out to be a successful
example of monetary elasticity, filling the gap before the new central
banking system took over. The checks and balances that characterize
the American constitution were strongly reflected in forming the kind
of banking system appropriate to a large subcontinent with widely
different economic interests. Memories and myths of the monsters of
the past - the First and Second Banks of the United States - ruled out
any single central bank. Instead twelve Federal Reserve Districts, each
with its own Reserve Bank, were established, with the larger districts
having a number of branches, currently twenty-five, plus twelve other
separate offices. All national banks had to become members of the new
system while it was hoped (overoptimistically) that the conditional
permission given to State banks to join would be taken up rapidly
enough to eradicate the acknowledged weaknesses of the dual banking
system. The member banks 'owned' their local Reserve Bank by each
member contributing the equivalent of 3 per cent of their own capital
(with another 3 per cent on call) to form the capital of their Reserve
Bank.
Each member bank had to deposit stipulated reserves with their
Reserve Bank, with the latter having to keep a minimum reserve of 35
per cent in lawful money against its deposits, with a 40 per cent gold
reserve behind its issues of Federal Reserve notes. Each Federal Reserve
Bank has a board of nine members comprising a balance of control
between small, medium and large local banks, local businessmen and
the main board in Washington. In this way each Reserve Bank became a
regional and local institution integrated into a nationwide system.
Borrowing facilities, mainly at first by rediscounting, were made
ubiquitously available for member banks all of which had to clear
cheques at par. Thus for the first time this basic business boon was
AMERICAN MONETARY DEVELOPMENT SINCE 1700
505
available nationwide - but mainly for member banks (with few
exceptions). Central control of this regionalized system was based not
in the economic capital, New York, but in Washington, the political
capital, so as to counterbalance the 'money trust'. In Washington sat
the seven members of the Federal Reserve Board (as it was originally
termed) comprising the Comptroller of the Currency, the Secretary of
the Treasury and five other members all appointed by the President but
having their independence strengthened by being appointed for
fourteen years and with membership later staggered by one member
retiring every two years. Regional equity meant that no two Central
Board members could come from the same Reserve District.
The massive compromise that determined the structure of the 'Fed'
has proved its merit by remaining basically unchanged; while it has
been flattered by imitation in the constitution of a number of central
banks not only in the Third World but also notably in the case of post-
Second World War Germany. Even in its operations, apart from the
disasters of the 1930s, the 'Fed' has been widely praised by economists,
with the exception of the strangely united Professors Milton Friedman
and Kenneth Galbraith. We shall now judge its progress, together with
that of the banks in general, first in its formative years up to 1928,
secondly during the catastrophic years of collapse from 1929 to 1933,
and then during the more positive period of reform and of wartime
finance up to the international conference at Bretton Woods in 1944.
During the period from 1914 to 1928 a central banking system which
had with great care and deliberation been formed as a regional
structure where local economic demands were in large part to
determine policy, became transformed operationally into a centralized
system based in reality in New York, where policy was determined
predominantly by the demands of Wall Street and of the international
money market, moderated, if at all, by whatever influence the
Washington Board of Governors could exert against the dominant
personality of Benjamin Strong, Governor of the Reserve Bank of New
York. Even the Treasury's greatly enhanced wartime powers, although
exercised nominally from Washington, were in practice largely carried
out through the agency of the New York Federal Reserve Bank. No
other federal reserve district carried anything like the economic weight
of that of New York, and the larger the number of Federal Reserve
Districts, the more prominent was the influence of New York. Intense
parochialism defeated its own object and played into the hands of the
nation's economic capital. As Professor Chandler has emphasized in his
brilliant biography of Benjamin Strong: Central Banker (1958): 'The
division of the rest of the country into eleven reserve districts rather
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than a smaller number' (such as the minimum of eight permitted under
the Act of 1913) 'served to decrease the size and probably also the
prestige of the other reserve banks relative to New York' (p. 46).
The New York Federal Reserve District was by far the country's most
important economic region, with its largest ports, most concentrated
banking centre and with the largest domestic and international money
market in the USA. New York was also easily the largest capital market,
whether dealing in private or government securities. Thus the Federal
Reserve Bank of New York quickly began to act as agent for purchasing
securities for the other reserve banks, whose staff, from top to bottom,
lacked the experience of those in New York. Issues of government
securities increased enormously after the USA entered the war in April
1917, the total national debt rising from around $1 billion in 1916 to
$25 billion in 1920. This again acted both in an obvious and in a more
subtle manner to increase the relative power of the New York Federal
Reserve Bank. The obvious and direct manner arose from the simple
fact of the immense size of government security dealings, the great bulk
of which was handled via New York. Before turning to the more subtle
and indirect results, it is necessary to take a brief glance at how these
events were moulded by that master technician and financial strategist,
Benjamin Strong; for even more obviously than is the case with
commercial banking, central banking is about people - particularly in
this period.
A triumvirate of exceptionally powerful central bankers towered
above their financial markets in the 1920s so as to achieve far-reaching
economic and political, as well as financial, results. These three,
Montagu Norman, Benjamin Strong and Hjalmar Schacht worked
closely together, the two former continuing their close wartime co-
operation; and all three, together with Fmile Moreau, president of the
Bank of France, helped to overcome in the financial field America's
post-war political lurch back into 'isolation'. Benjamin Strong first
came into public notice when he was made Secretary of Bankers Trust
in 1904. Bankers Trust had been formed in the previous year by a group
of New York bankers, led by H. P. Davison, who had become
increasingly concerned that the mushrooming growth of financial trusts
was depriving the commercial banks of many of their best customers.
Such trusts, being less constrained by minimum reserves and rules
restricting lending, could carry out a wider range of financial business -
with the exception of note issue -, grant higher rates on deposits and
lend at cheaper rates than could the conventional banks. On the well-
tried principle 'if you can't beat them, join them', Davison and his
colleagues therefore set up their own 'Bankers Trust' which, though
AMERICAN MONETARY DEVELOPMENT SINCE 1700
507
formed only in 1903, had grown sufficiently strong so as to play a
prominent role in aiding other banks and influential businesses during
and in the aftermath of the 1907 crisis. Thus Strong was well known,
well connected and had gained a wealth of highly relevant experience
when he was chosen as the first Governor of the Federal Reserve Bank
of New York in October 1914 and was thus launched 'on his way to
becoming the dominant personality and de facto leader of the entire
Federal Reserve System' (Chandler 1958, 41).
Strong quickly drew the threads of power into his own hands by
getting the agreement of the other eleven governors to form an
unofficial yet powerful Governors' Conference which met from time to
time under his chairmanship to lay down the system's operational
guidelines during the formative years from 1914 to 1917. Inevitably it
was Strong who was chosen to represent the American banking system
in dealings with foreign central bankers, duties which grew to crucial
importance during the war and post-war period. Here again the
glamorous attraction of striding across the international arena diverted
attention from the more humdrum regional financial scene. In Britain's
case, as we have seen, Montagu Norman gave a higher priority to
preserving the City of London than to curing the depression and
unemployment of the North and West. In America the combined and
related priority given to the interests of New York and international
finance inhibited the powers of the other Reserve District Banks and
allowed excessive domestic speculation to continue to grow until the
terrible climax of 1929.
The most subtle method by which the regional reserve system became
effectively centralized was however by a change in emphasis in
monetary policy from reliance on regionally determined discount rates
to the development under Strong's leadership of open market
operations, aided as this was by the enormously increased size of the
national debt. There had been general agreement by the framers of the
Federal Reserve Act that the desired 'elastic currency' could best be
supplied through 're-discounting commercial paper' at rates set by each
district according to its perception of the business needs of its particular
region. Such discount rates were 'subject to review and approval by the
Federal Reserve Board', the exact significance of which was later to
become a contentious issue. In addition each Reserve Board had
discretionary power as to which bills were 'eligible' for re-discount,
with short-term bills for financing 'real' goods being given preferential
acceptance and rates, compared with bills financing longer-term or
speculative deals. By 1917 at least thirteen different and confusing
eligibility categories had been established; but all such complexities
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were swept away for the duration of the war, during which government
paper rather than commercial bills became the fastest-growing and
most 'elastic' asset held by the banking system. The primary objective
of the Fed therefore changed from meeting the regionally differentiated
needs of business to that of meeting the centralized demands of the
Treasury. At the same time member banks that needed cash had a ready
alternative to borrowing from their Reserve Bank, by selling securities
themselves or using government paper rather than commercial paper to
back any such borrowing. Thus the formal independence of action
jealously assumed by each Federal Reserve Bank in setting its own rates
and deciding eligibility became of declining importance when the prices
of government securities were increasingly influenced by the operations
of the Federal Reserve Bank of New York and when variations in the
volume of sales and purchases were being determined by an emerging
open market committee dominated by Benjamin Strong. The war thus
clearly demonstrated the weakness of the false 'commercial loan' or
'real bills' theory as the key determinant of the money supply; but
inevitably it also undermined the regional foundations of the system.
After the war 'control over discount rates' again became 'an
important and far-reaching power', according to the Board's Annual
Report for 1921; but here again the lead was taken by Benjamin Strong.
To give an important example, when the Federal Reserve Bank of New
York raised its rate in June 1921 to the then record level of 7 per cent to
curb excessive borrowing, it was followed shortly afterwards by all the
other Reserve Banks. About a year later the previous independence of
District Reserve Banks in purchasing or selling securities was modified
when, to prevent the policies of one Reserve Bank being cancelled out
by another's actions, Strong in May 1922 set up a committee of five
governors to co-ordinate open market operations. According to
Professor Chandler, 'Never before 1922 had the Reserve Banks bought
or sold government securities for the purpose of regulating credit
conditions'. This tentative policy of restraint was flexibly and more
forcefully used in the opposite direction a couple of years later: 'The
easy money policy of 1924 was of historic importance, [being] the first
large and aggressive easing action deliberately taken by the Federal
Reserve for the purpose of combating a decline of price levels and
business activity and of encouraging international capital flows'
(Chandler 1958, 205, 241). This action helped Strong's friend, Montagu
Norman, to import enough gold to restore Britain's gold standard in
1925. In such ways Strong, between 1922 and 1928, skilfully and
successfully made combined use of the classical twin tools of central
banking, discount rate and open market operations, so as to turn the
AMERICAN MONETARY DEVELOPMENT SINCE 1700
509
potentially divisive Fed into a prestigious, unified and effective central
bank. Yet just a year after his death came the Great Crash of October
1929.
Feet of clay, 1928-1933
Although the 1929 Wall Street crash has had an impact on financial
history just second to that of the South Sea Bubble, it far exceeded its
earlier rival in scale, bringing to ruin the fortunes of hundreds of
thousands of speculators directly, and insofar as it led on to the great
slump, indirectly helping to impoverish many millions of innocent
workers in the USA and abroad who had never indulged themselves in
speculation. Nevertheless the financial crash did not lead to mass
defenestration in Wall Street nor even to an increase in the rate of more
normal forms of suicide. That tenacious myth has been fully exposed as
completely false in the statistics given in Galbraith's elegant and
brilliantly entertaining study of The Great Crash 1929. In our brief
glance at the world's greatest crash, as measured by its economic rather
than by its political weight, attention will be focused mainly on the
extent to which American monetary policy may be held responsible first
for initiating the boom, secondly for not restraining it when it had
obviously got out of hand, and thirdly for turning the financial crisis
into a general economic slump of world record proportions.
In contrast to the paeans of praise lavished on the Fed during the
years of Strong's leadership, its subsequent sins of permission, omission
and commission in the following six years have been widely and cruelly
exposed to public scorn by economists on both sides of the Atlantic and
of both monetarist and Keynesian persuasion, though with subtle
differences of emphasis. The particular fashionable object which
fascinates the public into joining the speculative spiral lies mainly in the
imagination of the speculator: tulips, exotic products from the south
seas, land in Florida, common stock command over consumer durables,
home ownership — all these and many other less substantial items have
furnished the excuse for exercising the cumulative and contagious
gambling instinct inherent in speculation. Without that mad, mass
instinct, money remains modestly used, with the velocity of turnover of
tulips, houses, etc. similarly remaining unremarkable. In such
circumstances monetary policies appear to be either neutral or under
control. However when mass hysteria strikes, monetary policy by itself
alone appears powerless to control the surging speculation: thus
historical explanations of a purely monetarist nature fail to be
completely adequate. If the mood of the masses becomes infected with
the speculation virus, then sufficient finance, in some form or other,
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will readily be found to feed a boom on to its inevitable crash. This is
not to say that economic, monetary and fiscal policies working together
are powerless to moderate the upsurge - far from it - but it does show
that monetary causes alone are insufficient to account for such extreme
cyclical phenomena, and it also follows that the power of monetary
policy alone is insufficient to give rise to, or to undo, the savage effects
of speculative financial cycles. These aspects are brought out with
crystal clarity not only in the actual development of the causes and
consequences of the 1929 crash but also in the significant differences
which remain (despite a wide measure of overlapping agreement in
certain other respects) between Professor Milton Friedman's deeper,
more technical but almost exclusive emphasis on the money supply, and
Professor Galbraith's wider economic and psychological view which
places much greater emphasis on the gambling instinct shown in the
'get-rich-quick' mentality of the speculators. Modern readers may
greatly benefit from combining the results of both streams of research.
That the speculative instinct was eagerly on the look-out for a
plausible excuse in the 1920s first became evident in the Florida land
boom which intensified from 1925 onwards, until halted by the
devastating hurricanes of September 1926 followed by similar storms in
1928. By that time the focus of speculation had moved from subtropical
property to common stocks traded on the New York Stock Exchange,
aided by the leverage provided by the fashionable craze for investment
trusts and the additional credit from the device of buying stock 'on
margin'. Thus just as the demand for stock multiplied, so did the
effective supply of credit. The New York Federal Reserve Bank cut its
rediscount rate from 4 per cent to 3 Vi per cent in the spring of 1927
partly in order to help Britain maintain its gold standard, a goal more
easily achieved if US rates were lower than those in Britain - and
causing President Hoover to describe Benjamin Strong as 'a mental
annex of Europe'. The Fed also expanded credit by purchasing
securities. Nevertheless Galbraith colourfully dismisses conventional
claims that by such actions the Fed encouraged the speculation shown
in the early stages of the boom as 'formidable nonsense' (1955, 15).
Similarly Professor Schumpeter mistakenly 'saw no connection between
Reserve policy in 1927 and the stock market boom of 1928-29'. Yet 'it is
hard to see why the Reserve System (can be) absolved from fault for
making these additional funds available' (Friedman and Schwartz 1963,
291). The balance of argument in blaming the Fed for stimulating the
boom in its early stages seems to the writer to be tilted strongly in
favour of Friedman's condemnation rather than towards the
exoneration shown by Galbraith and Schumpeter.
AMERICAN MONETARY DEVELOPMENT SINCE 1700
511
The increased supply of credit went further to stimulate speculation
because brokers needed to put down only a percentage - the 'margin' - of
the purchase price of the stock, which stock in turn acted as security for
the brokers' borrowings from their banks. Thus banks could borrow from
the Fed at around 5 per cent and re-lend it to the call market to finance
brokers and other speculators at 12 per cent, making this 'possibly the
most profitable arbitrage operation of all time' (Galbraith 1955, 27) . In
such circumstances discount rate policy — at least at rates then felt to be
acceptable - was largely ineffective as a brake on speculation. At the same
time the generally booming trends of the 1920s gave rise to budget
surpluses, thus reducing the Fed's holdings of government securities. At
the end of 1928 when it was becoming obvious that the boom should be
restrained the Fed held only $228 million of government stock: clearly
insufficient ammunition to reduce bank credit by open market sales to
anything like the required degree. Furthermore at that crucial time the
death of Benjamin Strong, in October 1928, left the Fed divided, drifting
and leaderless. The Board of Governors in Washington no longer deferred
to New York, while all twelve District governors assumed the role of the
Washington board to be a purely passive one, at most pursuing reactive
co-ordination and supervision. The seriousness of the situation did
however cause even the board to issue a statement in February 1929
asking the public for restraint in security speculation; but at the same time
it dithered and delayed in taking any firm action. A month later when the
Federal Reserve Bank of New York proposed to raise the rediscount rate
to 6 per cent the move was opposed by the Washington board and by
President Hoover, delaying such necessary, if insufficient, action until
August 1929. The Fed must thus also share considerable responsibility for
the continuation of the speculative mania.
By 3 September 1929 the great bull market had ended, and after a
short-lived plateau, the market crashed, typified by Black Thursday, 24
October, when nearly 13 million shares were sold at plunging prices.
Having fed the fever, the monetary authorities now proceeded to starve
the sick economy, persisting in a contraction of credit which is probably
the most severe in American history. The Fed which had been set up to
provide an elastic currency strangled its patient. Here Galbraith,
Friedman and practically all others who have conducted research into the
matter unreservedly blame the Fed for its actions. We have already noted
in the previous chapter Friedman's castigation of the Fed's inept policy,
while according to Galbraith, 'the Federal Reserve Board in those times
was a body of startling incompetence'; and President Hoover, who was in
the best contemporary position to know, described them as 'mediocrities'
(Galbraith 1955, 33).
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Businesses of all kinds went bankrupt, in part (but only in part)
because so many banks failed, and because even those banks that did
not fail still drastically cut their lending to customers in a downward
spiral so that between 1929 and 1933 total bank deposits fell by 42 per
cent and net national product by 53 per cent (Friedman and Schwartz
1963, 352). Some 2,000 banks failed in 1931, rising to around 4,000 in
the peak year for failures in 1933. Altogether 13,366 incorporated
commercial banks failed between 1920 and the end of 1933, including
8,812 in the four years from 1930 to 1933 inclusive. Even in the boom
years of the 1920s bank failures had averaged around 600 annually. The
banking system, always chronically weak, had, in the 31/* years
following the Great Crash, once again drastically failed the nation and
obviously needed urgent and fundamental reform.
Banking reformed and resilient, 1933-1944
Franklin D. Roosevelt's first action on becoming President on Saturday
4 March 1933 was to declare a national Bank Holiday from Monday 6
March. Every bank in the country, including even the Federal Reserve
Banks, were thus closed and allowed to reopen only after a special
investigating team, hurriedly rushed into action, had declared each
bank to be solvent. A number of States had already declared partial
Bank Holidays, but this was the first time in American history for such
a complete stoppage to occur in the country's main monetary artery,
and the natural domino effect of the increasing rate of bank failures was
brought at a stroke to its logical conclusion by presidential decree as a
necessary prelude to enforced reform of the whole financial system. The
world's largest economy was thus virtually bankless for at least ten
days. More than $30 billion of bank deposits, in a country more
dependent on such deposits than any other, were thus temporarily
immobilized, causing a desperate money shortage which the almost
simultaneous increase of around $1 billion in notes did little to
alleviate. The end of the Bank Holiday was signalized when the Federal
Reserve Banks reopened on 13 March, while by the end of the month
around half the pre-crisis number of banks had been allowed to start up
again. Many areas including many large towns in the industrial regions
remained without any banks for several months.
Meanwhile a vigorous legislative programme was being prepared
which, together with the harsh lessons of the crisis and the weeding out
of most of the weaker half of the banking system, considerably
strengthened the remaining structure. Insofar as the effectiveness of
such reforms can be gauged by the statistics of bank failures, these show
AMERICAN MONETARY DEVELOPMENT SINCE 1700
513
that from an average failure rate of over 2,200 banks annually in the
first four years of the 1930s they fell to an annual average of forty-five
during the rest of the 1930s. In the years from 1943 to 1960 the number
of annual failures never exceeded nine, and in 1945 only one bank
failed. It seemed that significant bank failures, of the kind that had
inevitably plagued the unit banking system of the USA for 150 years,
had been ruled out by the reforms of the 1930s. Such a welcome
conclusion, eagerly seized on by contemporary politicians and bankers
and even by certain prominent American economists up to the 1970s,
was later seen to be a display of premature optimism. Nevertheless the
enormous improvement in the bank failure rate does summarize the
salutary effect of the legal improvements which the financial crisis
forced the country to accept.
The implementation of Roosevelt's policy of reviving industry and
agriculture and of reducing the country's appalling total of 13 million
unemployed required a restoration of business confidence derived from
building a sound basis for the country's banking system. The New Deal
required a new banking system. The first relief agency, which had
already been set up by President Hoover in January 1932, was the
Reconstruction Finance Corporation. Its initial $15 million capital was
given by the Treasury and subsequently increased under Roosevelt. Its
stated purpose was 'to provide emergency financing for financial
institutions and to aid in financing agriculture, commerce and
industry'. With such a wide remit and under its energetic chairman,
Jesse Jones, the RFC provided supplementary capital to over 7,000
reopened banks, subscribed $10 million of the $11 million capital of the
first US Export-Import Bank in 1934 and made loans for infrastructural
improvements to almost every State in the 1930s. From 1941 to 1944 it
supplied vitally needed investment for military purposes. After the
Second World War the private sector financial institutions complained
increasingly of unfair competition, and in an era of full employment the
RFC was seen as redundant and so was eventually abolished in 1957, by
which time it had made investments of over $15 billion. Certainly it
played a major role in pump-priming the recovery of the 1930s. To
supplement housing finance eleven Federal Home Loan Banks were set
up in 1932, supplemented by the Home Owners Loan Corporation of
1933, while, with the ubiquitous assistance of the RFC, such finance
was still further increased when the Federal National Mortgage
Association ('Fanny Mae') was formed in 1938.
On the agricultural side a number of existing but diverse financial
institutions were given greater resources and their efforts more
effectively co-ordinated through the Farm Credit Administration set up
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under the Agricultural Adjustment Act of 1933. That innocuous-
sounding Act led, via the Thomas Amendment, to surprisingly
far-reaching results in that, first, it authorized the Treasury to expand
the note circulation by $3 million; secondly, it authorized the President
to devalue the gold content of the dollar; and thirdly, as an echo of the
old bimetallist days, it promoted and subsidized official purchases of
silver. Although substantial in themselves and also very significant as
indicating a Keynesian willingness by the US government to involve
itself more directly than ever before in the country's business affairs,
these developments were supplementary to the core legislation dealing
directly with the banks and the stock exchanges, the two main
institutional scapegoats that had acted to provide irresistible
encouragement and naked excuses for man's cupidity, elation and
depression; cursing 'the system' is modern man's variant of Adam's
blaming 'the woman'. The financial panic and slump produced a
corresponding legislative panic with over fifty financial bills being
introduced advocating all sorts of monetary cure-alls, such as Sylvio
Gesell's 'stamped money' (to encourage people to spend their way out
of depression) and Major C. F. Douglas's reflationary 'Social Credit'
schemes. But the winning formula, in banking as in the New Deal itself,
was based on a vague but pervasive acceptance of the essence of
Keynesian economics.
A driving force behind some of the more commonsense and effective
pieces of legislation was Marriner Eccles, newly appointed Governor of
the Federal Reserve Board. He was believed to be strongly influenced by
his staff economist, Lauchlin Currie - hence Eccles's proposals were
dubbed 'curried Keynes' (Hession and Sardy 1969, 731). The various
bills overlapped and borrowed ideas from each other. As we have seen in
the case of the Agricultural Adjustment Act, substantial reforms in
banking were contained in bills on other subjects as, with greater logic
and relevance, was done by the legislation on the stock exchange,
namely the Securities Act of 1933 and the Securities Exchange Act of
1934. Together these two Acts increased the penalties for rigging the
market, insisted on better licensing of members of the exchanges,
demanded that fuller information be given to the public on new issues,
and above all set up a new Securities and Exchange Commission with
power to examine and approve most new issues. It was armed with
strong investigative powers: the SEC was equipped with a fine set of
teeth which it has subsequently used to good effect. The 1934 Act also
gave the Federal Reserve System responsibility for regulating the
amount of credit based on securities. This was the origin of the brake
on speculative credit through variations of 'margin' requirements:
AMERICAN MONETARY DEVELOPMENT SINCE 1700
515
Regulation T, limiting credit to brokers; and Regulation U limiting
lending by banks for other security purchasers.
The more purely banking legislation comprised the Glass-Steagal
Act of 1932, the Banking Act of 1933 and the Banking Act of 1935. The
purpose of the Glass-Steagal Act was to enable an easier increase in the
money supply, or at any rate to prevent its further harmful reduction
following recent substantial exports of gold from the USA. First, it
allowed government bonds to supplement gold to some extent as
backing for note issues. Secondly it made it much easier for member
banks to borrow from their Reserve Banks by widening the range of
acceptable collateral. The Banking Act of 1933, in a classical version of
belated stable door locking, sought to prevent member banks from
extending credit 'for the speculative carrying of or trading in securities,
real estate or commodities or any other purposes inconsistent with the
maintenance of sound credit conditions'. Investment banking and
ordinary commercial banking had to be completely separated, and
commercial banks had to sell off their investment affiliates. Because it
was believed (with some justification despite Professor Friedman's
denial) that the payment of interest on demand deposits led to banks
being tempted to take on too risky business to compensate for the high
interest costs, the banks were henceforth prohibited from paying
interest at all on demand deposits and were limited on the rates of
interest which they could pay on time deposits by maxima laid down by
the Federal Reserve Board: an authority exercised as Regulation Q.
Important changes were made in the administration of the Fed, which
because they were taken further in the 1935 Act will be described
shortly. In retrospect, by far the most important feature of the 1933
Banking Act was the establishment of the Federal Deposit Insurance
Corporation: 'in all American monetary history no legislative action
brought such a change' (Galbraith 1955, 197). Through the payment of
a small premium by practically all the banks, a substantial sum was
available to guarantee the repayment of customers' deposits, technically
up to a certain maximum but in practice without limit. Not only
Reserve member banks but almost all other banks joined, so that soon
after FDIC came into operation in January 1934, 97 per cent of total
bank deposits were guaranteed. A condition of membership of FDIC
was the submission to inspection by corporation staff, thus significantly
improving the coverage and quality of such inspection especially in
areas where bank inspection had previously been notoriously weak.
The Banking Act of 1935 confirmed and placed on a more permanent
basis most of the reforms relating to banking in the previous legislation.
The changes it proposed in the administration of the Federal Reserve
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System shifted power further away from New York and the Federal
Reserve Districts towards Washington. The former 'governors' of the
twelve Districts were demoted simply to 'presidents'. The Federal
Reserve Board was renamed the Board of Governors of the Federal
Reserve System, and the members of its Open Market Committee were
given greater independence by having their period of appointment
lengthened to fourteen years. The board was given authority to vary the
reserves that member banks were required to hold at their Reserve
Banks, with the amounts increasing from country districts, through
reserve cities to central reserve cities. Finally the system was encouraged
to give the public more information on its decisions and the reasons for
reaching such decisions. American monetary policy has thus
subsequently been conducted in a white blaze of publicity in a
courageous attempt to bring money and the bankers who create it
under more democratic control. This transfer of power to Washington
coincided with and reflected massive disillusion with monetary policy
and thus led to an increasing acceptance of the superiority of fiscal and
planning mechanisms. This slide to Keynes is further illustrated both by
the adoption of cheap money techniques and by the devaluation of the
dollar. Internally and externally, Keynesian ideas of managed money
were adopted. To try and prevent such 'monkeying about with money'
and to eradicate all forms of the new Keynesian heresies, some forty
established economists led by Professor E. W. Kemmerer of Princeton
united to form the Economists' National Commission on Monetary
Policy. Despite such powerful opposition, Keynesianism triumphed,
becoming initially more enthusiastically welcomed in the United States
than in Britain. This early influence on policy in the USA was largely
the result of the ability of Lauchlin Currie to recruit a number of gifted
young Keynesian economists, such as J. K. Galbraith, to work in key
government departments and in the Fed in the 1930s and 1940s.
The breakdown of America's internal monetary system in 1933
necessitated a correspondingly urgent readjustment in the external
value of the dollar. As soon as the national Bank Holiday was declared
controls had to be introduced on the sale and purchase of gold.
Eventually in January 1934 the Gold Standard Act of 1900 was replaced
by the Gold Reserve Act. This raised the official price of gold from its
old level of $20.67 to $35 per fine ounce - a substantial devaluation of
69.33 per cent. In this new gold standard the internal circulation of gold
was ended and all private and bank-held gold was transferred to the
Treasury. The value of official gold stocks rose by $2.8 billion, of which
$2 billion was used to set up a Dollar Stabilization Fund to maintain the
new fixed gold price. (Part of the remainder was most aptly used later
AMERICAN MONETARY DEVELOPMENT SINCE 1700
517
to help pay the US contribution to the original capital of the IMF and
World Bank.) The silver lobby used this occasion to press with success
for the Silver Purchase Act of June 1934 whereby the government was
forced to purchase silver in sufficient quantities to comprise a quarter
of the total metallic money stock. Such vast purchases at first raised the
world price of silver to such an extent as to force China off its silver
standard and to cause many other countries to demonetize their silver
currencies. Thus, perversely, the long-term result of the silver lobby's
action was a drastic fall in the demand for silver (outside America) and
therefore in its free market price, and a further disruption to
international trade. However, such was the lingering power of the silver
lobby that the Silver Purchase Act was not repealed until 1963.
Eventually the slow pace of economic recovery rose substantially
when Europe again became embroiled in war in September 1939, and
rose still more after America's entry in December 1941. Thereafter
monetary policy was still further subordinated to government
imperatives, with the Fed strongly supporting the seven War Loans and
the Victory Loan raised between 1941 and 1946. The national debt,
which was only $16 billion in 1930, rose to a peak of $269 billion in
1946. Interest rates were kept low by the readiness of the Fed to
purchase government paper. The rate for Treasury bills of ninety-day
maturity was fixed at 3/s of 1 per cent; medium-term paper rates earned
between 7k and 1 per cent while even bonds of between five and twenty-
seven years earned only up to 2Vi per cent. Government debt had
become interest-bearing money, forming a huge reservoir of liquidity
which made normal techniques of monetary control useless. New direct
controls on credit were used instead, one of the most effective of which
was Regulation W, which laid down minimum deposits and maximum
maturities for consumer durable goods, thus quickly freeing resources
for defence purposes. By such means the war was successfully financed
at cheap rates, while the physical controls and rationing, though
nothing like as severe as in Britain, suppressed most of the inflation
until after the war ended. Already by mid-1944 the proven success of the
new forms of economic planning inspired the nations' leaders to
prepare for the huge task of post-war reconstruction.
Bretton Woods: vision and realization, 1944-1991
Whereas the economies of most European countries had been
devastated by the war, the powerful US economy had gained in
strength, with its gross national product showing a remarkable rise
from $209 billion in 1939 to $234 billion in 1947 and to more than $500
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billion in 1960. The post-war growth rate at 3 Vi per cent per annum in
real terms 'exceeded by a considerable degree the rate from the
beginning of the century to World War IF (Economic Report of the
President, January 1961, 48). America was able to make 'the swiftest
and most gigantic change-over that any nation has ever made from war
to peace', according to the Economic Report of the President, January
1947. By the end of that year the output of civilian goods had already
risen above all previous records, a trend of progress which continued, so
that by 1965 the actual volume of consumer goods was double that of
1947. In contrast the European picture at the war's end looked grim in
the extreme. Out of such devastation, the rebuilding of Europe's
economies was a triumph of the human spirit - assisted by Keynesian
economics and American wealth skilfully combined and generously
distributed. America's buoyant economy supplied vital resources which
through the Anglo-American Loan and the generous gift of Marshall
Aid gradually helped Europe in the 1950s and 1960s to share with
America a long period of unprecedented growth with full employment.
This happy outcome exceeded the most optimistic expectations of most
of the 730 delegates from forty-four countries who had met at Bretton
Woods, New Hampshire, to plan the framework for the post-war
system of international trade, payments and investment. Out of their
deliberations, with their minds wonderfully concentrated by the war,
emerged the most comprehensive and successful group of financial
institutions of global scope in world history: the International
Monetary Fund and the International Bank for Reconstruction and
Development. It will be convenient at this stage to examine briefly the
origins and subsequent achievements of these two organizations and to
assess their contribution to the smoother working of international
payments and to the improved flow of world savings and investment.
Plans for a complementary third institution, the International Trade
Organization, failed to be ratified by the US Congress, but did at least
prepare the way for the General Agreement on Tariffs and Trade, the
initial meeting of which was held at Geneva in 1947, and with which the
Bretton Woods organizations have liaised closely ever since.
The twin financial institutions were very much, and very naturally,
given the military situation, an Anglo-American concept, personally
dominated by Keynes and by Harry Dexter White, chief economist at
the US Treasury and a lifelong admirer of Keynes. They worked
unsparingly to achieve a remarkably successful degree of compromise,
despite the strong opposition of ultra-conservatives in the US Congress
who were aghast at what they saw as the overliberal, spendthrift and
'socialistic' Keynesian ideas. They both died before seeing the full fruits
AMERICAN MONETARY DEVELOPMENT SINCE 1700
519
of their efforts, Keynes in April 1946, and White in August 1948 shortly
after he had been arraigned by America's modern version of the Spanish
Inquisition, the Committee on Un-American Activities. White scaled
down Keynes's ambitious plans for an International Clearing Union
with access to at least $26 billion, to what he felt he might be able to get
a critical Congress to accept, which was less than a third of Keynes's
desired minimum. The twin organizations began operating in May
1947, facing a sea of troubles. By 1951 the fifty members of the Fund
had made contributions (apart from a few arrears) of $8.16 billion,
payable 25 per cent in gold or dollars and the rest in their own
currencies. Exactly one half came from the combined contributions of
the USA (34 per cent) and Britain (16 per cent). Third came China (7
per cent), then France (6 per cent) and India (5 per cent). The quotas
were based initially on crude assessments of ability to pay, but later
incorporated increasingly sophisticated estimates of relative gross
national products, with general revisions naturally having to be made,
kicking up much dust, every five to six years. Nine general revisions
were agreed by 1991.
So clamorous was the initial demand by a hungry world for
American goods and services that the Fund's resources were soon seen,
as Keynes had predicted, to be woefully inadequate. Consequently
demands on the dollars in the Fund had to be strictly rationed
according to its 'scarce currency' provisions, so long as the huge 'dollar
gap' persisted. This was not, as some prominent pessimists feared, for
ever, but only until the 1950s.
Within its politically constrained limits the Fund has achieved some
considerable degree of success in pursuing the six objectives laid down
in its Articles of Agreement. These were: (a) to promote international
monetary co-operation; (b) to facilitate the expansion and balanced
growth of international trade . . . promote high levels of employment
and real income (at least above what they would otherwise have been);
(c) to promote exchange stability and to avoid competitive exchange
depreciation (which had wrought such havoc in the 1930s); (d) to assist
in the establishment of a multilateral system of payments; (e) to give
confidence to members by making the general resources of the Fund
available to correct maladjustments in balances of payments; (f) to
shorten the duration and lessen the degree of such disequilibrium. For
twenty-five years, prosperous beyond pre-war dreams, the IMF helped
to hold most of the world's trading nations linked to the US dollar (and
hence to gold) at fixed parities that were adjusted from time to time
when 'fundamental disequilibria' brought about enforced changes to
newly fixed parities, such changes being assisted by the facilities offered
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by the IMF. The ending of dollar convertibility into gold at the $35
price in 1971 was not the body blow to the IMF that many feared and
quite a few hoped. The Fund took to the post-1973 world of floating
rates like a duck to water, quickly adapting to the demands of the new
regime.
Above all the Fund has not simply sat back patiently awaiting
requests for help, but on the contrary has adopted an active,
investigatory role vigorously carrying out its mandate, under clause 4 of
its articles, to 'exercise firm surveillance over the exchange rate policies
of its members'. It has interpreted its mandate widely. Surveillance
amounts in reality to detailed inspection through staff consultations
with the monetary authorities of its member countries. In the peak year
for such investigations, 1985, the IMF carried out as many as 131
official consultations. To its many detractors, including once eager
borrowers later burdened with guilt and repayments, the IMF and its
full-time staff (1,691 in 1989) are seen as interfering, do-gooding
busybodies, yet the skilled, outsider's viewpoint carries an objective
value of which Keynes, and Robert Burns doubtless, would have
approved:
O wad some Pow'r the giftie gie us
To see oursels as others see us!
It wad frae mony a blunder free us,
And foolish notion.
Where monetary policies are concerned, the most foolish and costly
of notions abound, making the IMF's external and politically neutral
advice, as Britain and others discovered in the hyper-inflationary mid
1970s, cheap at the price. Undeterred by its critics, the Fund in
September 1989,
reaffirmed the central role of surveillance in fostering more consistent and
disciplined economic policies; noted the contribution of the Fund to the
process of policy coordination through its work on key economic indicators
and the development of medium-term scenarios . . . and encouraged the
Executive Board to continue improving the analytical and empirical
framework underlying multilateral surveillance, including the measurement
and consequences of international capital flows. (IMF Summary
Proceedings 1989, 241-2)
Given his action in resigning from the Versailles Peace Conference in
1919 as a protest against excessive reparations against Germany, Keynes
would also have warmly approved the magnanimity with which the
USA's Marshall Plan and the resources of the Bretton Woods
AMERICAN MONETARY DEVELOPMENT SINCE 1700
521
organizations were made available to Germany and Japan, even though
Britain's 'reward for losing a quarter of our national wealth in the
common cause' was, according to The Economist, 'to pay tribute for
half a century to those who have been enriched by the war' (quoted by
Brian Johnson in his stimulating study of The Politics of Money 1970,
131). The assistance to Germany and Japan came at a most critical
time, changing despair into hope and helping to inspire them towards
their economic miracles. As the leader of the Japanese delegation to the
44th Annual Meeting of the Fund and Bank has stated:
At the time it joined the Fund and Bank in 1952 Japan [like Germany] was
running chronic trade deficits. The very next year, 1953, and again in 1957,
Japan borrowed a total of about $250 million from the Fund to tide it over
hard currency shortfalls. Between 1953 and 1966 Japan came to the Bank to
borrow $850 million for modern highways, the bullet train and other basic
industrial projects. At one point we were the second largest borrowing
country from the Bank.
By July 1990 these loans were all fully repaid (Ryutaro Hashimoto,
Summary Proceedings, 44th Annual Meeting IMF, September 1989, 29).
For most of their history, however, it is in connection with their
activities in the so-called Third World that the merits and demerits of
the Bretton Woods organizations have mostly been judged, aspects to
which we return in chapter 11. All along, whether helping economically
advanced or backward countries, it has been the USA that has been the
major contributor; and it was largely in connection with its balance of
payments problems that a push was given to the adoption of another
Keynesian concept, namely that the Fund itself could manufacture gold
- or at least 'paper gold' through inventing its 'Special Drawing Rights'.
Keynes had repeatedly proposed from 1943 to 1946 that his
'International Clearing Union' should be authorized to create an
international reserve currency, to be called 'Bancor', to tide over
countries with balance of payments deficits, and with which countries
with surpluses could be credited rather than with gold, thus imposing
an added discipline on surplus countries absent in the old gold standard
and in the new IMF. Harry White also proposed a similar but much
paler version based on a currency he called 'Unitas'. Such notions were
however quite unacceptable so long as the USA enjoyed massive balance
of payments surpluses, so that it was not until the Dollar Gap had been
replaced by a Dollar Glut in the 1960s that the American authorities felt
able to support the IMF's belated acceptance of a variant of Keynes's
paper gold concept. The phenomenal growth of world trade in the
1960s and 1970s necessitated a much larger pool of international
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liquidity than could be built on a fixed amount of gold or the volatile
supply of dollars. The IMF did periodically manage to increase its
members' quotas, which more than doubled between 1959 and 1975, but
this was inevitably a lagged response after long and tortuous
negotiations. The Fund also received substantial injections of the
currencies most in demand, those of the ten major industrial nations, in
the form of General Agreements to Borrow, the first of which,
amounting to $6 billion, was arranged in 1962. (The ten were Belgium,
Canada, France, West Germany, Italy, Japan, the Netherlands, Sweden,
UK and, most importantly, the USA.) Other supplements to the Fund's
resources include: 'Buffer Stock' and 'Compensatory and Contingency
Financing', primarily to assist LDCs to control the stocks and maintain
the flows of essential exports and imports; 'Extended Funds Facilities'
exist to provide medium-term finance of as long as four years to help
members make 'structural adjustments' to their economies; and
'Enhanced Burden Sharing' enables poor members to catch up on their
arrears so as not to debar them from the Fund's facilities. The Fund has
thus been diligent in developing modern banking skills to find ingenious
ways of fulfilling its remit.
All these devices, however admirable, simply redistribute existing
reserves more efficiently, but the agreement in 1969 to accept SDRs
represented a most significant innovation in world monetary history, for
the IMF had, out of nothing, created international reserves which
member countries have a right to draw upon in addition to their normal,
regular drawing rights, usually when the latter have been used up to their
quota limits. All countries had by then learned to dispense with internal
gold circulation and to do without gold backing (in almost all cases) for
domestic currency. They were now at least beginning to act in the same
way with regard to international currency, helping to create and accept
collectively what they could not and would not individually, namely
abstract or 'fiat' reserves, and to be less dependent on the constraints of
an almost fixed supply of gold or on the vagaries of the changing
favourites among a small group of national currencies. All the same, as
an essential insurance policy the IMF still holds very substantial reserves
of gold. These amounted to 3,217,341 kilograms at 30 April 1989,
valued at SDR 279.6 billion. Total currency reserves came to SDR 561.8
billion, and this included Fund-created SDRs which amounted to only
21.5 billion, that is less than 4 per cent of total reserves (IMF Annual
Report for 1989). The statistics therefore show that as yet international
fiat reserve money, although accepted in principle for over twenty years,
has been used rather modestly. There is a long, long way to go before the
SDR reaches anything like its true potential.
AMERICAN MONETARY DEVELOPMENT SINCE 1700
523
If the fixed-rate— adjustable-peg system established in 1944 could
have been maintained indefinitely (i.e. fluctuations limited to 2 per cent
bands with parity revisions permissible under specific conditions) then
faith in the SDR might well have grown sufficiently to fulfil the
Keynesian vision. There are, however, a number of compelling reasons
to excuse the relatively poor progress of the SDR. First, bankers, and
especially the central bankers whose duty it is to partake in the IMF's
activities and to advise their governments, show a marked preference for
the practical, tried and tested forms of international currency, and an
aversion to theoretical abstractions of academic parentage, which have
been on the world stage for only the briefest of periods compared to the
many centuries during which gold and some of the national reserve
currencies have been in daily use. Secondly, whereas for two decades
after 1945 there was a widespread acceptance of the good intentions of
planners and bureaucrats and a willingness to give these experts the
benefit of the doubt, this amiable but soft characteristic was later
replaced by strong, hard scepticism. Neither Whitehall nor Washington
(where the IMF was sumptuously installed) really knew best. Most
governments could not be trusted to manage money and were too ready
to increase liquidity, whether at home or abroad. Thirdly, differences in
rates of growth and even more so in inflation caused economies to
diverge so widely that previously fixed rates of exchange could no
longer be held. The pound was forced to devalue in 1967, while by 1968
the USA was running a deficit in its balance of trade, the first such since
1893. Exchange controls were rapidly strengthened in a number of
countries but still speculation continued against the dollar (despite
assistance from Germany and Japan), to such an extent that on 15
August 1971 the USA could no longer promise to sell gold to the other
central banks at the fixed price of $35. The apparent basis of Bretton
Woods had thus been swept away when the anchor of the system had
slipped - and the 'adjustable peg' was about to be replaced by a botched
repair job, known by its optimistic admirers as the 'crawling peg'.
President Nixon convened an emergency meeting of the ten major
trading nations in December 1971 at the Smithsonian Institute in
Washington. The result was hailed by Nixon as 'the most significant
monetary agreement in the history of the world' - a premature and in
retrospect a preposterous statement; and barely plausible at the time,
even given the crisis in the world's payments system. A general
realignment of currencies was arranged, with the IMF permitting a
wider, AVi per cent band and with the official price of the dollar being
raised from $35 to $38, representing a devaluation of around 10 per
cent. The new structure began to collapse almost immediately. The
524
AMERICAN MONETARY DEVELOPMENT SINCE 1700
pound was floated in June 1972 amid continuing speculation against
deficit countries, including the USA. In February 1973 the dollar was
again devalued by about 11 per cent, raising the official gold price to
$42.22. By the middle of the year most countries were in fact ignoring
their band limits and were floating. All the pressures of speculation
were now diverted on to the dollar, so that by November 1973 the USA
had also abandoned trying to hold on to a fixed price for gold even in
its official dealings with other central banks.
The IMF, which had been sidelined by these momentous events, had
now to adjust to a world of 'clean' and 'dirty' floating - which it has
done with commendable ease, adroitly changing its philosophy towards
emphasizing market solutions, including privatization of nationalized
industries, wherever possible in LDCs, well before such attitudes
became popular in eastern Europe. In 1991 it succeeded in getting an
increase in quotas of record size, its ninth general review raising the
total by 50 per cent from SDR 99.1 billion to SDR 136.7 billion. The
SDR is limited to official usage connected directly or indirectly to
balance of payments purposes, and so remains remote from all retail
and normal business usage. No one is ever likely to be found with an
SDR in his pocket. Yet its valuation and rates of interest are set by
market forces, within an official framework. The unit value of the SDR
is determined daily by summing the market value in dollars of a basket
of the currencies of the five countries with the largest exports, with the
base being revised every five years. The percentage weights based on
January 1991 (with the previous base in brackets) were: US dollar 40
per cent (42); Deutsche Mark 21 per cent (19); yen 17 per cent (15);
pound sterling 11 per cent (12); the French franc also 11 per cent (12).
Thus, to give an example in order to pin the slippery SDR down to
earth, its value on 22 March 1991 was equivalent to $1.37 or DM 2.25
or Y187.16 or £0.76 or Fr.7.66. Similarly the rate of interest on SDRs is
calculated weekly from the weighted average of short-term rates on the
money markets of the same five countries, being for instance 7.86 per
cent on 1 April 1991. Thus SDR rates are less volatile and considerably
lower than hard-pressed borrowers would otherwise be likely to face - a
generally unsung method by which the IMF helps its members.
Despite the medium-term volatility of the dollar, the long-term
dominance of the USA in world trade is obvious from the above figures,
fully justifying the original decision to locate the headquarters of the
Bretton Woods organizations in that country. It may be anomalous that
such financial institutions were placed in the political capital,
Washington, whereas that of the corresponding international political
institution, the United Nations, was placed in the financial capital,
AMERICAN MONETARY DEVELOPMENT SINCE 1700
525
New York. This possibly reflects entrenched American attitudes
towards the checks and balances of the Constitution, extended thereby
to the international sphere. More direct external American financial
involvement is seen in the belated but substantial presence of American
banks abroad.
American banks abroad
Although by 1913 the United States had already become the world's
largest economy its banks remained inward-looking, leaving the finance
of its growing external trade to foreign, mainly British, banks. The
insignificant role played by American financial institutions overseas is
emphasized by the stark fact that with over 23,000 banks in 1913 only
half a dozen banking trusts operated a derisory total of twenty-six
branches abroad. This quasi-colonial dependence grew to be a matter
of considerable concern in the first decade of the twentieth century, but
could be altered only by fundamental changes in the legal basis of
banking. As we have seen, strictly speaking, national banks were not
allowed branches, whether at home or abroad - an opinion specifically
confirmed by the Attorney-General in 1911 - while most State banks
were far too small to contemplate such a step. Yet foreign trade had
increased tenfold since the Civil War, and by 1913 the USA had changed
from being a net debtor to becoming a substantial net creditor, a
position about to be increased yet further during the First World War.
The National Monetary Commission of 1911 complained that 'the
impediments in the way of the development of our international trade
are numerous. Perhaps none of these is more important than the
absence of American banking facilities in other countries. We have no
American banking institutions in foreign countries. The organisation of
such banks is necessary for the development of our trade' (para. 15).
The committee also felt that although 'the status of the US as one of the
great powers in the political world is now universally recognised, we
have yet to secure recognition as an important factor in the financial
world'. Commensurate recognition did not arrive until fifty or so years
later, but a start was made in dismantling the impediments to the
branching of American banks abroad in the Federal Reserve Act of
1913. For 'whereas British banks pushed out all over the world without
any encouragement from Parliament, the growth of similar venturing
by U.S. concerns had been directly due to legal enactments' (Thorne
1962, 145). Unlike British lawyers, their more numerous American
counterparts had, like President Jackson, never forgotten the perilous
permissiveness of the South Sea Bubble, and so have been ever ready to
526
AMERICAN MONETARY DEVELOPMENT SINCE 1700
shackle their bankers or at least have attempted to confine their
activities within strictly defined legal boundaries.
By section 25 of the original Federal Reserve Act member banks with
a capital of not less than $1 million could, with the approval of the
Federal Reserve Board, set up branches abroad. An amendment passed
in September 1916 allowed small banks to club together to establish
joint foreign banking corporations, which came to be known as
Agreement Corporations. Following pressure by Senator Walter Edge of
New Jersey, section 25(a) was added in December 1919 which
authorized the Federal Reserve Board to charter corporations with a
minimum capital of $2 million 'for the purpose of engaging in
international or foreign banking'. The activities of these 'Edge Act
Corporations' have since been governed by the board's Regulation K.
Provided that they confined themselves to assisting foreign trade, Edge
Act Corporations could be set up anywhere, including other States
within the USA. Thus banks in the Midwest could open up offices in
New York, San Francisco or Miami, greatly facilitating their overseas
operations. This marked a breach in the unit banking system and was
the first piece of legislation specifically allowing (admittedly limited)
interstate branching, a privilege that has continued despite the
subsequent passing of the McFadden Act of 1927 which reinforced the
traditional prohibition against interstate branching. The Federal
Reserve Act also allowed US banks to participate in the 'ownership and
control of local institutions in foreign countries', a provision which
formed a prudent alternative to setting up branches of American banks
'in localities where economic nationalism or demonstrations against
dollar imperialism runs high' (Nzeribe 1966, 12). With the legal
impediments thus having been removed between 1913 and 1919,
American banks began to expand rapidly abroad, with total branches
rising from twenty-six in 1913 to 181 in 1920. This flattering rise,
artificially stimulated by the First World War, was reversed in the next
few years when half these branches closed, leaving only ninety-one
branches abroad in 1924. Gradually the numbers grew again to reach
another inter-war peak of 132 in 1933, just before the great bank
closures of that year. By 1945 there were still, almost incredibly, only
ten US banks operating abroad with a total of just seventy-eight
branches. By 1960 mergers had reduced the number of US banks
operating abroad to only eight, although the number of their offices
abroad had grown to 131, and their total assets to around $4 billion.
American dominance in the world economy was still far from being
reflected in the rather insignificant part played by American banks
abroad.
AMERICAN MONETARY DEVELOPMENT SINCE 1700
527
Attention was drawn in the previous chapter to the Radcliffe Report's
short-sighted dismissal of the presence of American banks in Britain as
being relatively unimportant in the domestic financial scene in 1959,
while in 1961 the Report of the US Commission on Money and Credit
completely ignored the subject. During the 1960s the tempo began to
change, aided by the liberalization in 1963 of Regulation M by which
the Fed governs member banks' foreign operations. By 1965 some
thirteen banks operated around 200 branches abroad, and thereafter
growth continued almost uninterruptedly until the stock market crash
of October 1987.
The total of foreign branches, operated by twenty-nine banks,
reached 500 by 1970, 600 branches of thirty-seven banks by 1972, and
by 1980 some 200 US banks had opened around 800 branches abroad
with representation in all the significant financial centres of the non-
communist world. The three largest banks alone had 343 such
branches: Citicorp 150, Bank-America 110 and Chase 83. Total assets
held in all foreign branches had multiplied by over one hundred times in
the twenty years after 1960 to reach over $400 billion. Apart from the
rise in offshore banking in the Bahamas and Cayman Islands, most of
the reasons for this exodus have already been examined (in the previous
chapter). By and large this movement simply represented and reflected
American direct investment abroad, a rising tide which alerted the
French author Servan-Schreiber to depict it in frighteningly dramatic
terms in his most influential work, The American Challenge. Looking
forward fifteen years from 1968 he feared that 'the world's third greatest
industrial power, just after the United States and Russia, will not be
Europe, but American industry in Europe1 (1968, 3). Yet he barely
mentions the key role played by the banks in this transatlantic transfer,
and also failed to notice the early signs of the reverse flow of European
(and Japanese) capital into the USA. This reverse flow later raised blood
pressures in the USA. 'The rapid growth of foreign direct investment in
the United States during the 1980s has stirred public debate over the
desirability of the continued accumulation of US assets by foreigners
. . . but no evidence suggests that present or foreseeable levels of foreign
ownership of US industry should be troublesome' {Federal Reserve
Bulletin, May 1990, 277): a confident declaration of the Fed's faith in
free trade.
A significant change in geographic distribution accompanied the
growing export of American banks in the twenty years from the mid-
1960s. Although London remained the principal magnet, high taxation
in the UK in the early 1970s and its previous record of sluggish
economic growth compared with that of its European neighbours were
528
AMERICAN MONETARY DEVELOPMENT SINCE 1700
in large part responsible for diverting much of the growing flood of
funds, first to continental Europe and later, much more substantially, to
tax havens such as the Bahamas and Cayman Islands. US branches in
continental Europe rose from twenty-one in 1965 to seventy-one in
1970. Total deposits in all foreign branches of US banks rose from $30
billion in 1969 to $109 billion in 1973, but in that period the proportion
held in the UK fell from over two-thirds (67.3 per cent) to just over a
half (50.9 per cent). That held in the rest of Europe grew marginally
from 18 per cent to 20 per cent (though substantially in absolute
amounts). The really important change was the share held in the
Bahamas and Caymans, which trebled in those same four years, rising
from 7 to 21 per cent, and continued to grow strongly thereafter as the
advantages of these tax havens became more profitably obvious. By
1981 the assets held in the branches of US banks abroad had grown to
$460 billion, and while the UK had still managed to attract the largest
share, with $160 billion, that of the Bahamas and Caymans had almost
grown equal, at $150 billion. Their share on average slightly exceeded
that in the UK during the three years from 1986 to 1988. This apparent
equality is however grossly misleading, for whereas the Bahamas and
Caymans were largely just tax havens, often with little more than
'name-plate' or 'shell' branches, London remained the world's greatest
Eurodollar and foreign exchange market providing superlative, if costly,
facilities for every type of banking activity. The assets of American
banks' foreign branches practically reached a plateau in the 1980s,
rising by the comparatively moderate amount of $90 billion in the nine
years after 1981 to reach a total of $549 billion in January 1990 with the
shares of the UK and of the Bahamas and Caymans groups both
claiming around 30 per cent or so of the total, each with $167 billion.
When foreign banks play only a minor role in their host country they
benefit from escaping in general the restrictive regulations imposed on
indigenous banks, but as they grow in importance so they are forced to
conform more or less equally to the rules governing domestic banks.
Thus by the International Banking Act of 1978 most of the Federal
Reserve and other regulations, such as the keeping of minimum reserves
and the limitations on branching, were made applicable to foreign
banks' branches — an unmistakable signal of their growing strength.
Around the same time the American authorities became concerned
about the diversion of funds into the tax havens of the West Indies, with
the result that from 1981 'International Banking Facilities' could be
established within the US granting similar fiscal and regulatory
privileges to those available in the offshore centres of the Bahamas and
Caymans. Within a year such IBFs had attracted over $100 billion that
AMERICAN MONETARY DEVELOPMENT SINCE 1700
529
would probably otherwise have gone to swell the offshore total.
Nevertheless, as in the case of flags of convenience in shipping, tax
havens in banking, despite concerted international attempts to widen
the application of the Basle rules on capital adequacy, pose dangers to
depositors and borrowers arising from the temptations of lax
administration. Despite the disappointments and the much publicized
heavy losses suffered by some overseas banks in the USA (such as
Midland Bank's disastrous experience with Crocker National), assets
held by foreign banks within the USA continued to grow in the difficult
years of the 1980s, rising from $80 billion in 1984, equivalent to 17 per
cent of assets in American banks abroad, to $209 billion in 1990, when
they were equivalent to 38 per cent of the total amount held in
American banks' foreign branches. A fairer comparison of the relative
position of US banks abroad with foreign banks within the US is
obtained if the amount held by US banks in the Caribbean tax havens is
excluded. Then the assets of foreign banks in the USA in 1990 came to
around 55 per cent of the total held by US banks worldwide (excluding
the Bahamas and Caymans). Obviously neither the existence of over
13,000 US banks nor the legal minefields had by the 1990s managed to
prevent a sizeable penetration of foreign banks into the USA to
compensate to a considerable extent for the weight of American banks
abroad.
The invasion of foreign banks into previously neglected or protected
domestic markets not only reflects the growing integration of the global
financial markets but also provides a most powerful illustration of the
theory of 'contestable markets' in current practical operation. As US
financial institutions expand abroad the demand for reciprocity by
foreign bankers will not only increasingly break down the barriers
separating countries, and financial sectors within and between countries,
but also will in time erode those anachronistic rules which have largely
prevented interstate banking within the USA. Ease of entry also helps
fundamentally in inhibiting the operation of monopoly power by the
large multinational banks. This applies especially to US banks 'because
of their central importance in the world banking system, and because
they provide a model for the strategic development of banks in other
countries' (Coulbeck 1984, xv). Contrary to conventional opinion -
particularly in US legal circles - the advantages of scale and scope
which favour the giant banks are not incompatible with competitive
markets, provided that ease of entry, encouraged as it is by the lever of
reciprocity, leads, as it should, to keeping financial markets open and
'contestable', and provided also that these generally overlooked and
underestimated free-market controls over monopoly are not thwarted
530
AMERICAN MONETARY DEVELOPMENT SINCE 1700
by the well-meaning but often perverse 'anti-monopoly' restrictions
beloved by American administrators and their lawyers (Davies and
Davies 1984). The belated but massive movement of American banks
abroad is thus helping to bring about long-needed, substantial changes
within America's domestic financial scene - to which picture we now
return.
From accord to deregulation, 1951-1980
The rate of inflation is inescapably one of the main criteria by which the
effectiveness of central bank policy should be judged. Whether it should
be not simply 'one of the main' but 'the main' or even 'the only'
criterion is a subject still being hotly debated by bankers, economists
and politicians worldwide. America's inflationary record in the 50-year
period from 1950 to 2000, as measured by the annual average change in
consumer prices, is given in table 9.3, with figure 9.1 smoothing the
annual rates decade by decade. Although American attempts to achieve
price stability fall far short of those of countries like West Germany or
Switzerland, yet, as a glance at the similar tables given in the previous
chapter readily prove, the American record is far better than that of
Britain. Like most countries, the USA has experienced almost unbroken
and significant degrees of inflation for over half a century with only one
year, 1953, showing a fall in prices, and then of only 0.4 per cent. But
double-figure inflation has at least been avoided, except, barely, in 1974,
with 10.0 per cent, and again, almost, in 1980, with 9.9 per cent;
although during the spring quarter of that year the rate frighteningly
reached 14.6 per cent. During the post-Second World War period as a
whole American inflation was on average not much more than half the
rate suffered in Britain. However, what is remarkable is that in both
countries the pattern has been surprisingly similar. Since the overt
acceptance of monetarist policies inflation has been far worse than
when Keynesian policies prevailed. Thus figure 9.1 shows that the
average annual rate in the twenty 'Keynesian' years after 1950 was
around 2.4 per cent, whereas that of the twenty 'monetarist' years after
1970 was, at 6.3 per cent, well over double the previous rate.
Even if, as extreme monetarists claim, inflation is purely a monetary
affair, yet the Fed cannot alone be held responsible either for the
moderate degree of inflation experienced from the 1940s to the end of
the 1960s nor for the higher inflation of the 1970s and 1980s. In
common with the Bank of England and a number of other central
banks the Fed found that one of its most important traditional
AMERICAN MONETARY DEVELOPMENT SINCE 1700
531
Table 9.3 Consumer price inflation in the USA, 1950-2000.
Year Annual average Year Annual average Year Annual average
change in price change in price change in price
0/ 0/ 0/
/o /o 10
1950
4.7
1968
5.8
1986
1.9
1951
2.9
1969
5.5
1987
4.1
1952
2.8
1970
5.2
-i no o
1988
A O
4.8
1953
-0.4
1971
6.1
1989
5.2
1954
2.7
1972
4.4
1990
5.4
1955
3.4
1973
8.2
1991
3.1
1956
4.0
1974
10.0
1992
2.9
1957
2.8
1975
8.3
1993
3.0
1958
2.0
1976
5.7
1994
2.6
1959
2.3
1977
6.8
1995
2.8
1960
1.3
1978
8.0
1996
2.9
1961
1.3
1979
8.9
1997
2.3
1962
2.5
1980
9.9
1998
1.6
1963
1.2
1981
8.7
1999
2.2
1964
1.5
1982
5.2
2000
3.4
1965
3.0
1983
3.6
1966
4.1
1984
3.6
1967
2.5
1985
3.3
2.1%
7.8%
2.7%
4.7%
1950 to 1960
1960 to 1970
1970 to 1980
1980 to 1990
2.6%
1990 to 2000
Figure 9.1 Consumer price inflation in USA in decades 1950-2000. :
"Average annual rates
Sources: Federal Reserve Bank of Richmond Review 8, 1 (Spring 1991);
Federal Reserve Bank Bulletins (1990, 1993-2001).
532
AMERICAN MONETARY DEVELOPMENT SINCE 1700
weapons, the discount rate, was virtually useless for seventeen years
before 1951, while ever since 1946 it has been mandated to achieve a
number of often incompatible objectives, including especially support
for maintaining full or at least maximum possible levels of employment
and output. In the period from 1934 to 1941 a frightened world poured
its gold into the United States to such an extent that the country's gold
stocks rose by a massive $14.9 billion. The banking system therefore
enjoyed excess reserves and so had no need to borrow from the Reserve
Banks, which in any case laid emphasis on low interest rates to
counteract high unemployment. As in the UK, when cheap money
ruled, bank rate and discount rate became otiose.
Cheap money was needed to finance the war, from 1941 to 1945, at
low cost and so banks were supplied with sufficient reserves to enable
them and their customers to purchase government debt, which grew
from $58 billion in 1941 (equivalent to 47 per cent of GNP) to $259
billion in 1946 (125 per cent of GNP). To support the Treasury's sales of
debt the Fed was required to purchase bonds in the open market. The
result of this was to monetize the national debt and, while this policy
was fully justified in war, it was conveniently (for the Treasury)
continued into the post-war period. This provoked increasing
reluctance on the part of the Fed, which was thereby prevented from
using discount rate as a weapon of monetary constraint even at a time
of inflation. Eventually in March 1951 a famous 'Accord' was reached
with the Treasury by which the Fed gave up its automatic support for
bonds and confined its open market operations to 'bills only'. This
strict policy was modified in February 1961 to 'bills preferably', which
allowed the Fed to give the Treasury support on special occasions, such
as when large new issues or conversions were being made. The Accord'
and its amendment indicate the often overlooked burden of a large
national debt with its tendency to erode central bank independence and
explain the impatiently felt desire and overriding need for the Fed to be
free of Treasury restraints in order to carry out monetary policy
effectively. From March 1951, after seventeen years on the shelf,
discount rate was brought back into operation - but with a significant
difference.
When the system was set up in 1913 and for two decades afterwards,
discount rate was consciously perceived as a regionally differentiated
rate, 'established' separately by each Federal Reserve District Bank
according to the economic needs of its own region, although 'subject to
review and determination' by the Federal Reserve Board. The wars
(Second and Korean) simply accelerated natural market moves towards
a nationally determined set of interest rates. As the Commission on
AMERICAN MONETARY DEVELOPMENT SINCE 1700
533
Money and Credit later acknowledged with regard to the powers of the
District Banks to set their own interest rates, 'In practice this
appearance of a measure of regional autonomy has largely yielded to
the national nature of the money market' (CMC Report 1961, 84).
The inflationary overhang of the national debt was not entirely
removed by the 'Accord'. The shorter the average age to maturity of the
national debt, the greater is its potential liquidity and therefore its
potential inflationary pressure. The average maturity of the US national
debt fell very substantially from 8.2 years in 1950 to 3.5 years in 1970.
This was partly because an unrepealed law passed by Congress in the
last year of the First World War to hold down the cost of financing that
war laid down a maximum rate of AVi per cent for bonds in excess of
five years - a restraint which was not removed until 1971. Thus fiscal
policy had in some form or other inhibited vigorous Federal Reserve
action throughout the 'Keynesian' period of relatively low inflation.
Probably the most overt and powerful evidence of Keynesian
philosophy was in the enactment of the Employment Act of 1946 and in
its subsequent amendment in 1978, by which latter date Keynesian
concern for full employment was to be joined with Friedmanite
measures of the monetary aggregates: two incompatible bed-mates.
According to section 2A of the Federal Reserve Act as amended by the
Humphrey— Hawkins or Full Employment and Balanced Growth Act of
1978, 'The Board of Governors of the Federal Reserve System and the
Federal Open Market Committee shall maintain long-run growth of the
monetary and credit aggregates commensurate with the economy's
long-run potential to increase production, so as to promote effectively
the goals of maximum employment, stable prices, and moderate long-
term interest rates.' To achieve full employment, high capacity
production, and moderate interest rates through ambitiously hitting
long-range, moving monetary targets - all this appears to be another
triumph of monetarist hope over practical experience. Furthermore, by
setting national levels of employment and production as objectives, the
Act yet again increased the central, as opposed to the regional,
determination of monetary policy, even if the Federal Reserve District
Boards still participate in policy discussions. They talk, but they have
little power to act.
Hardly had the ink dried on the Humphrey-Hawkins Act before
faith in monetary targeting began to evaporate. Ml, the original
favourite, became increasingly unreliable despite technical tricks such
as being divided into MIA and M1B (to take cognizance of 'NOW'
accounts) and then later recombined into a new Ml. In 1982 the Fed de-
emphasized its former favourite and eventually in 1986 completely gave
534
AMERICAN MONETARY DEVELOPMENT SINCE 1700
up setting a target for Ml, though continuing to do so for the hitherto
less volatile M2 and M3. Hope springs eternal in the monetarist breast.
Thus Robert L. Hetzel still argued strongly that if the Fed really stuck
to 'an operationally significant target for M2 in the form of a trend line
that rises at three per cent per year' then this 'will eliminate inflation'
(Federal Reserve Bank of Richmond Economic Review, Sep-
tember-October 1989). The Act also set long-term goals for
unemployment - of 4 per cent by 1983: it turned out to be nearly 11 per
cent. The set target for inflation was 3 per cent by 1983 (almost
achieved) and zero by 1988, the latter being yet another example as it
happened of wishful thinking. It was, however, with regard to the
objective of 'moderate' rates of interest that expectations went most
grossly awry. Record rates of interest were being charged and offered
involving an increasing variety of monetary instruments and a wider
range of institutions in 1979 and 1980 especially. Commercial banks'
prime lending rate, which had been as moderately low as 6% per cent in
May 1977, rose to 11.5 per cent by December 1978 and then shot up
through 15 per cent in October 1979 to a record of 21.5 per cent in
December 1980.
Such unprecedentedly high rates stimulated an ever wider and ever
faster spread of financial innovation, for those institutions that would
not or could not join in the new competitive games (because of archaic
usury laws, maximum rate ceilings, conservatism or inertia) lost
deposits, profits and market shares. Member banks became
increasingly irritated by the existing restrictions and so many left the
system that the Fed's scope of monetary control, such as it was, grew
ever narrower. Eventually the fundamental legal structure of the
American banking system was forced to adopt its first major change
from the framework laid down in the crisis years of 1933 and 1935. This
overdue, market-driven reform, entitled the 'Depositary Institutions
Deregulation and Monetary Control Act' (DIDMCA), was passed on
31 March 1980 with its provisions phased into the following six to seven
years.
The main features of that watershed Act were as follows. First, it
directly addressed the erosion of Federal Reserve membership and the
narrowing of monetary control by insisting that all deposit-taking
institutions were to be subject to the Fed's reserve requirements in a
phased programme from November 1980 to September 1987 (in effect
this allowed former member banks to hold smaller reserves than before
while raising those for most of the non-members). Second, in return all
depositary institutions were given access to their Federal Reserve
District Bank's discount window and similar privileges. Third, all
AMERICAN MONETARY DEVELOPMENT SINCE 1700
535
interest rate ceilings on time deposits were to be phased out in stages
over the following six years. In other words it was 'goodbye to
Regulation Q'. Four, in similar vein Negotiable Order of Withdrawal
Accounts were allowed for all depositary institutions nationwide as
from the end of 1980. These NOW accounts, which had first been
introduced in Massachusetts in 1972, were nominally interest-bearing
time accounts but could be switched on demand into checking
accounts. The Fed had already authorized the counterpart ATS
accounts (automatic transfer from savings accounts) so that the old
barriers insisted upon in the crisis-driven laws of the 1930s were broken
down. Transactions-money and savings-money intermingled and
overlapped, more responsive than ever to changes in interest rates:
hence the volatility of poor Ml. Five, State usury ceilings for mortgages
and for a number of other loans were abolished (but could specifically
be reinstated by new State legislation: the dual system could kick back).
Six, the insurance limits on deposits in banks and thrifts were raised to
$100,000. Whether this last 'reform' was such a good idea became a
furiously debated item in the following decade. Before considering why,
brief mention should be made of the Garn-St Germain Act of 1982
which, by considerably widening the powers of Savings and Loan
Associations, complemented the deregulatory provisions of DIDMCA.
This new 'Depositary Institutions Amendment Act' confirmed the right
of thrifts to grant consumer loans, allowed the acquisition of a failed
bank or thrift by an out-of-state banking organization and authorized
deposit accounts 'directly equivalent to and competitive with' the
money market mutual fund deposits that had seriously diverted funds
away from banks and thrifts over the previous decade. As a result
Money Market Deposit Accounts and 'Super-NOW' Accounts
(interest-bearing transaction accounts with no rate ceiling) enabled
banks and thrifts to claw back a proportion of previously lost deposits.
Thrifts began vigorously to diversify their assets - dangerously so,
lulled into a false sense of security by their long-suffering deposit
insurance system.
Hazardous deposit insurance for thrifts, banks . . . and taxpayers
For most of the post-Second World War period Savings and Loan
Associations (S&Ls) enjoyed remarkable success, growing in numbers
to around 5,000 and claiming a rising share of assets relative to those of
other financial institutions, up from 6 per cent in 1950 to a peak of 16
per cent in 1984. By 1990 however their numbers had halved, mostly
from mergers and failures, to around 2,500, with an estimated 20 per
536
AMERICAN MONETARY DEVELOPMENT SINCE 1700
cent economically insolvent and with their market share of assets back
down to about 11 per cent (Kaufman 1990). Since most of their assets
were in mortgages with rates fixed at the low interest rates ruling in the
1950s and 1960s the later substantial rise in rates required to hold on to
their deposits inevitably led to more and more thrifts becoming
insolvent, squeezed by relatively fixed incomes and unavoidably rising
costs. They searched desperately for more profitable (and riskier)
business. Their regulatory authority, the Federal Home Loan Bank
Board, interpreted DIDMCA liberally and allowed S&Ls to issue credit
cards and offer unsecured loans from July 1980. With regard to
liberalization it was a case of too late and too much.
Just as the banks were insured from 1934 on by the Federal Deposit
Insurance Corporation so were the S&Ls by the Federal Savings and
Loan Insurance Corporation, with the maximum limit per account
similarly being raised periodically to the $100,000 agreed in 1980. Since
the insurance applied to each account rather than to each individual it
was possible and profitable for large sums of money to be deposited,
commonly via brokers, to seek out the highest returns in separate
accounts in any number of S&Ls. The rich and greedy as well as the
poor and cautious were equally protected. The depositor was forcing
the insurer to accept his bet of 'heads I win, tails you lose'. This in
technical jargon is known as 'moral hazard'. Neither the depositors nor
the owners (who usually had relatively little capital to lose and who
often included the managers) had any incentive to be cautious and every
incentive to seek profitable ventures as far as the rules would allow. In
1985 runs on thrifts in Ohio and Maryland led to the insolvency and
disappearance of their state-chartered deposit insurance agencies. In
1986 large losses in Texas and elsewhere by federally chartered S&Ls
led later in that year to FSLIC itself being officially declared to be
insolvent despite having staved off that inglorious debacle for a number
of years by dint of creative accounting. It was kept in existence only by
an emergency injection of $10.8 billion provided under the Competitive
Equality Banking Act of 1987, which Act nevertheless perversely
extended the principle of 'forbearance' (i.e. not closing failed
institutions promptly) for savings institutions in depressed areas. The
FSLIC still listed 340 S&Ls as insolvent as at January 1989, while its
chairman estimated that up to 800 S&Ls with nominal assets of $400
billion needed to be sold, merged or liquidated. Unofficial estimates
include that of the prestigious Brookings Institute which conservatively
estimated losses exceeding $100 billion or $400 per US citizen
{Blueprint for Restructuring America's Financial Institutions, May
1989). According to the Wall Street Journal of 22 May 1989 the
AMERICAN MONETARY DEVELOPMENT SINCE 1700 537
Table 9.4 US bank failures and new bank formation, 1977-1992.*
Year Number failed New banks Year Number failed New banks
1977
6
154
1985
120
318
1978
7
148
1986
138
248
1979
10
204
1987
184
212
1980
10
206
1988
200
237
1981
10
199
1989
206
193
1982
42
316
1990
168
170
1983
48
366
1991
124
109
1984
79
400
1992
168
74
Total from 1977 to 1992
1610
3590
i:" These are FDIC Insured Banks and do not include failures of some very small
banks.
Sources: Federal Reserve Bulletin, March 1989; FDIC Annual Report 1992.
Jennifer J. Johnson, Associate Secretary, Federal Reserve Board, kindly
provided me with the most recent figures.
Government's General Accounting Office put the full costs of rescue at
$285 billion or $1000 per household. Maximum micro-economic
security had led to maximum macro-economic costs. Before looking at
congressional action to repair this hopeless situation we turn to
examine the frightening increase in bank failures and the impact on the
FDIC.
From the start of Federal Deposit Insurance in 1934 until the end of
1992 the total number of failures of insured banks came to 2,015 of
which no less than 1,260 or two-thirds have taken place since 1985. The
severity of recent failures is even more dramatically illustrated when
one considers that the aggregate of deposits in all the banks that failed
in the 59-year period from 1934 to 1992 inclusive came to $207.5 billion,
of which no less than $158.4 billion or 76 per cent were in banks that
failed in just the last five years, from 1988 to 1992 inclusive. In the 32-
year period from 1943 to 1974 failures were always below ten annually.
Table 9.4 shows how the number of failures began to soar from 1982. In
the eight years following 1985 the number of failures has always
equalled or exceeded 120 annually with an average of over 160. In many
cases failure occurred shortly after the banks had been publicly given a
clean bill of health. Auditing and accounting in the USA (as in Britain
with the Johnson Matthey and BCCI affairs) have in recent years been
exposed as being almost as inexact as the traditional dismal science
itself. Of the fifty-six banks that failed between 1959 and 1971, thirty-
538
AMERICAN MONETARY DEVELOPMENT SINCE 1700
four had been passed by their supervisor in a 'no problem' category
while seventeen were rated as 'excellent'.
Subsequent failures included large banks like the National Bank of
San Diego in 1973, Franklin National in 1974 and most frightening of
all the near collapse of Continental Illinois Bank which would have
failed between 1982 and 1984 had it not been for the intervention of the
monetary authorities. Because of the devastating effect which such a
failure would probably have had on the banking system as a whole the
authorities stepped in with a rescue package, but in doing so their 'Too
Big to Fail' philosophy increased the moral hazard throughout the
nation's financial industry. The FDIC's list of problem banks rose from
218 in 1980 to 1,600 in 1987, while from the figures already given ratings
of 'no problem' and even of 'excellent' among the other 13,000 banks
were hardly cast-iron guarantees. By the time the rate of annual failures
rose to 200 in 1988 and 206 in the following year FDIC was registering
the first annual losses in its history. Faced by such alarming trends, on
top of the shambles of the S&Ls, Congress passed the fire-emergency
Financial Institutions Reform, Recovery and Enforcement Act in August
1989. Re-regulation was back on the agenda and not a moment too
soon.
FIRREA spawned a new regulatory alphabet and gained immediate
financial backing with $50 billion being provided as the initial amount
for a Resolution Funding Corporation to close or sell insolvent thrifts.
It set to work with vigour. By early 1993 it had already disbursed $84.4
billion of taxpayers' money in closing down 653 S&Ls. The 1989 Act
replaced the FSLIC with the Savings Association Insurance Fund,
hopefully known as SAIF, under the control of FDIC, which was also to
run a new Bank Insurance Fund. A new Office of Thrift Supervision
directly under the Treasury replaced the old Federal Home Loan Board.
More importantly, capital ratios for all banks and thrifts were to be at
least 6 per cent by mid-1991 with the 8 per cent risk-capital ratios of the
Basle Agreement guidelines as a target for the end of 1992. The Act
attempted to push S&Ls back more into their traditional business by
giving preferential treatment to a reclassified 'qualified thrift lender' i.e.
one with at least 70 per cent of its assets in or closely related to housing.
Conversely, it limited the amount of permitted investment in junk bonds
and the use of brokered deposits. It attempted to make bank holding
companies more responsible for the solvency of each bank subsidiary.
Finally FIRREA asked the Treasury with FDIC to make a
comprehensive study of the key problems of a viable and efficient
system of bank and thrift deposit insurance - an invitation which
launched a plethora of papers by bankers, supervisors, economists,
AMERICAN MONETARY DEVELOPMENT SINCE 1700
539
politicians and especially lawyers, resulting in intriguing proposals
regarding e.g. 'camels' and 'haircuts'. (The 'CAMEL' is a rating given
by examiners based on Capital, Asset quality, Management, Earnings
and Liquidity. Thus low ratings might be penalized by high premiums.
In general, risk-based premia could go very well with risk-based capital
ratios. The 'haircut', proposed by the American Bankers Association,
would grant depositors only a proportion rather than the whole of their
nominal claims, except for the lowest depositors.)
From the 1980s in particular the burden of bank insurance has been
shifted cumulatively on to the shoulders of the taxpayers. Angry
taxpayers have therefore pushed the authorities not simply to consider
scrappy and piecemeal emergency remedies but to face the urgent need
for a fundamental reform of the American banking system, including
especially the question of nationwide branching. Britain, and more
tellingly neighbouring Canada, have had very few failures since they
replaced unit banking with nationwide branching a century ago.
From unit banking . . . to balkanized banking
A hundred years ago William Jennings Bryan campaigned against
America's being 'crucified on a cross of gold'. Subsequently both gold
and his beloved silver have been demonetized: yet America's monetary
system remains enchained by centuries-old traditions and outmoded
legal prohibitions, around, through, under and over which, at some
considerable cost, modern market forces eventually with painful
slowness find their way. It is incredibly incongruous when millions of
dollars can instantly be transmitted across the globe by satellite that US
banks, the main creators of their country's money, may still not be able
to open a branch even a few miles away (especially in other States)
without quite disproportionate effort, frequently involving numerous
committees up to and including the Board of Governors of the Fed to
examine the most trivial details. For instance the public is gravely
informed that Chairman Greenspan and Governors Johnson, Angell,
Kelley and LeWare after due consideration voted on 9 February 1990
against Cedar Vale of Wellington, Kansas becoming a bank holding
company through acquiring a bank that 'is the 245th largest banking
organisation in Kansas controlling less than one percent of the total
banking deposits' of that State, but '10.3 per cent of total deposits in
the local market' {Federal Reserve Bulletin (April 1990), 257). It is just
as difficult to believe that the Board of Governors is subject to being
overruled in granting permission for mergers or new branches by the
Department of Justice whenever a pseudo-scientific index of monopoly
540
AMERICAN MONETARY DEVELOPMENT SINCE 1700
power in local banking districts — the Herfindahl— Hirschman Index —
rises above the magical figure of 1800. (Happily in practice the Fed
usually refuses to bow down to this false god of numbers: see the note
on p. 548 on concentration ratios.)
Despite the legal obstacles, considerable progress has been made in
the post-Second World War period in gradually but cumulatively
changing from a predominantly unit banking system to one where some
form of branch banking is the norm. Even so, because with very few
exceptions nationwide branching has been strictly prohibited,
compared with other countries the American system of branching is
still highly circumscribed. Federal laws restricting branching stem from
the National Bank Act of 1864 strengthened by the McFadden Act of
1927, the Banking Act of 1933 and the Douglas Amendment to the
Bank Holding Company Act of 1956, the combined effects of which are
first to prohibit interstate branching and secondly to concede to the
States the authority to determine the degree of intra-State branching, if
any, and of BHC subsidiaries that may be allowed. The existence of
both federal and State laws, usually euphemized as the 'dual' system, is
in fact, as we have already noted, more like a permutation among fifty-
one differing varieties as each State copies, modifies or misinterprets the
examples of the others. Nevertheless two outstanding general trends
have made themselves even more strongly felt in the last few decades:
first, the development of nationwide quasi-banking services offered by
bank holding companies and 'non-bank' corporations, and, second, the
marked liberalization of State laws to permit full banking throughout
ever larger geographical areas of their States, and almost full banking
with their neighbours.
The main loophole which has been exploited to allow the spread of
banking services is the emphasis in the generally accepted legal
definitions that a bank necessarily offers two kinds of banking services,
namely deposit-taking on the one hand plus money-transmission
services normally through cheque accounts on the other. Institutions
offering limited or specialized services might thus escape branching
restrictions. We have already seen how the Edge Act Corporations by
simply offering specialized services to encourage international trade
were enabled to cross State lines as early as 1919. By the mid-1980s
there were 143 interstate Edge offices operated by forty-nine banks.
Improved communications and technological innovations have enabled
much greater exploitation of this limited banking services principle in
recent years by banks, by non-banks and by that uniquely American
invention, the 'non-bank bank'. By 1982 forty-four banks were
operating 202 single-purpose, self-described 'Loan Production Offices'
AMERICAN MONETARY DEVELOPMENT SINCE 1700
541
spread over thirty-four States. An intense and justified irritant to
bankers was the fact that non-bank firms such as Merrill Lynch, Sears
Roebuck, J. C. Penney, IBM Credit, and the three largest car companies,
General Motors, Ford and Chrysler, could compete in the provision of
finance right across the USA, whereas the banks were confined within
their own metropolitan areas, counties or even, at best, within their
own State boundaries. A popular method of hitting back was through
the bank holding company.
Until the Bank Holding Company Act of 1956, holding companies
doing some limited banking could set up shop anywhere, just like most
non-banking companies. That Act brought multi-bank holding
companies, i.e. those with two or more banking subsidiaries, within
Fed regulations, which included a prohibition of mixing banking with
non-banking business. However, by forming 'one-bank' holding
companies a way was found around these restrictions, greatly
stimulating the formation of these singular forms until Congress was
forced to close the loophole in the Bank Holding Company
Amendment Act of 1970. This, however, did allow subsidiaries to
engage in certain peripheral banking activities provided these were
'bank-related and in the public interest'. Subsequently the Fed
increasingly liberalized the kinds of banking activities allowed by
subsidiaries so that the momentum to forming bank holding companies
continued to roll. Thus by the end of 1973 there were some 1,677 such
companies controlling 3,097 banks holding nearly two-thirds of all
commercial bank deposits. Because bank holding companies 'share
many advantages of a branch system they are especially common in
states like Texas where branching is prohibited or restricted' {Federal
Reserve Bank of Kansas Economic Review (May/June 1990) , 55) . Not
only were the functional boundaries between banks, thrifts, finance
companies and so on breaking down, but so also were many of the
geographical divisions that had previously characterized the rather
atomized American banking system.
One factor leading to fewer unit and more branch banks was the
growth in mergers in the banking industry in the 1970s and 1980s. The
annual number of mergers grew from 135 in 1976 on a gradually rising
trend to 188 in 1980, and thereafter accelerated to 359 in 1981, 422 in
1982, 432 in 1983 and 553 in 1984 before falling slightly to the still very
high figure of 472 in 1985 {Federal Reserve Bulletin, March 1989). Some
mergers were hotly disputed, but few to the degree of that between
Manufacturers Trust and Hanover which though approved by the Fed in
1961 was delayed by legal wrangles for five years: the 1992 merger
between 'Mannie Hannie' and Chemical Bank turned out to be a much
542
AMERICAN MONETARY DEVELOPMENT SINCE 1700
less contested marriage, though far bigger in size, which is illustrative of
changing attitudes towards such fusions of power. More than half the
1,610 failed banks shown in table 9.4 were eventually acquired by other
banks as part of the 'purchase and assumption' method of disposal
commonly arranged by the FDIC. Thus the rise in the number of
holding companies, the growth in mergers and the increase in bank
failures have all tended to spread the linkages of banks, in some
important cases even across previously unbridgeable States. The
Garn-St Germain Act permitted the acquisition of failing banks or
thrifts by out-of-State banks from October 1982, thus confirming the
action taken, with Fed permission, a few weeks earlier when New
York's Citicorp stretched across the continent to rescue Fidelity S&L of
Oakland, California. Much more important than far distant linkages
however has been the spectacular growth of interstate banking, mostly
among neighbouring States, which has revolutionized the structure of
American banking in the last decade or so. (See also p. 546.)
Although formal branch banking across State boundaries (with very
few exceptions) remained forbidden, the situation has been outflanked.
States armed with the Douglas Amendment and using the device of the
bank holding company have already infiltrated each other's territories
to such a degree as to regionalize, and perhaps even to balkanize, the
country's banking system. This applied even to many of the States that
had been the most stubborn in clinging to America's unit banking
traditions. By mid-1990 there were at least 160 'interstate' bank holding
companies controlling 465 bank subsidiaries in different States. Since
1975 and up to 1990 every State in the Union, except five (Hawaii, Iowa,
Kansas, Montana and North Dakota - hardly the financially most
important States) passed interstate banking laws allowing access by
other States into their banking markets, most only from neighbouring
States but some allowing entry from any part of the country. The
crucial matter is that the States can decide from where and in what form
such entry will be allowed, mostly on a reciprocal basis. The move to
interstate banking began quietly enough in Maine, which in 1975
legalized entry by banking companies headquartered in other States. In
1982 both New York and Massachusetts enacted interstate legislation,
but whereas New York allowed entry to all other States provided they
did the same for New York's institutions, those of the New England
States conferred reciprocity only to banking companies within the New
England region, so excluding the much-feared, giant New York banks.
The latter duly challenged the New England States for equal rights of
entry, only to find that in a key decision in June 1985 the US Supreme
Court upheld the New England principle of selective entry.
AMERICAN MONETARY DEVELOPMENT SINCE 1700
543
However, in a complete reversal of previous history, States that had
fought tenaciously for around two centuries to keep outsiders - and
particularly the big banks - off their banking patches now began to
compete vigorously to attract outsiders, even in some important
instances, from the main money centres like New York and Chicago.
The first State to use the bank holding company as a vehicle to
stimulate regional development and employment creation was South
Dakota, which in 1980 removed all usury ceilings on credit cards and
permitted fees to be charged on such cards. Thereby it enticed New
York's Citibank to transfer its lucrative card business to Sioux Falls,
South Dakota. By 1987 Citibank had become the largest bank in South
Dakota, with domestic assets of $12 billion and providing employment
for 3,462 persons. The lesson was quickly learned by other States - and
by other banks (even in Britain) which quickly slapped on similar high
interest rates and fees for credit cards. From 1980 therefore States felt
free to make regional compacts without having to fear that their own
banks would necessarily be swamped by the invasion of some of the
world's most powerful banks, and knew that if they did allow such
entry they could now lay down conditions limiting such entrants to
specialized banking that did not compete with the general banking
business of their own banks. Thus in much less than a decade the
concept of regional banking had become a reality.
In 1913 America's central banking system had been built on the
regional principle - but it was not until some seventy years later that the
time was ripe for regionalism to become a reality in the life of American
commercial banking. Surveying interstate banking developments in
February 1987 the Federal Reserve Bulletin observed that 'those
advocating regional interstate banking laws argue that the development
of large regional banks promotes the area's economic growth. The
theory is that such banks by understanding and supporting regional
industries, will do more for economic growth than the money centre
banks would' (p.80). South Dakota has shown how even the money
centre banks could be recruited with those same ends in view.
When bank holding companies could thus spread ever more widely it
clearly made less sense than ever to cling on to the relics of unit banking
including especially the formal but outmoded and outflanked
restrictions on branching. It is still - incredibly - the case that at the
start of the last decade of the twentieth century neither federal nor State
laws (except in Massachusetts) allow banks in general to open branches
across State lines nationwide. As for branching within States, the
convenient and usual practice is to classify the States into three classes:
those allowing State-wide branching, those allowing none, and those
544
AMERICAN MONETARY DEVELOPMENT SINCE 1700
which cover the extremely wide range in between. Because somewhere
or other in the 'United' States (obviously not yet completely united in
terms of banking) lawyers are continually engaged in disputing the
extent to which their selection of laws allow branching, the statistics
quoted by various authorities sometimes show significant differences;
but the general picture is as follows: first, despite occasional
backsliding, the long-term trend is unmistakably one-way, towards ever
greater geographic freedom and towards a continuous rise both in the
absolute number of branches and as a percentage of total banking
offices. In 1900 only eighty-seven banks boasted branches, which in
total came to 119. By 1929, 764 banks operated 3,533 branches. The
number fell in the crisis years of the 1930s but grew slowly thereafter to
reach 4,700 branches in 1950. They then more than doubled to 10,200 in
1960, and again to 21,400 in 1970. They reached 38,400 in 1980 and
46,300 in 1987. This average of around three or four branches per bank
is still pathetically small compared with that of countries with long-
established branch banking systems: yet it clearly marks the end of a
centuries-long tradition of unit banking, as does the parallel change in
the legal rules governing branching.
In 1929 almost half the States completely prohibited branching. The
number of these 'unit' banking States then fell slowly, from the 1929
figure of twenty-three, to fifteen in 1939, and thereafter at an even
slower pace, to twelve in 1979. In the 1980s the rate accelerated, leaving
only two stubbornly unit States, Colorado and Missouri, in 1990 as
remnants of a once solid Midwestern bloc. By that time only twelve
States were still in the limited branching category, while the thirty-six
remaining States allowed State-wide branching (even though nine of
these still restricted this freedom to cases of merger). In effect, however,
by 1990 State-wide branching existed practically throughout the nation,
though subject to varying conditions and legal interpretations. These
legal changes reflected at long last the logic of market forces. Since 1980
especially, technical innovation, the deregulation of interest rates and of
functional boundaries between separate financial institutions
accompanied and stimulated geographic deregulation despite legal
delaying tactics such as the contested merger cases already mentioned.
Among the most absurd was the attempt to prevent regional and
national networks of Automatic Teller Machines by insisting that
ATMs were branches, so that the networks should be confined within
branching limits - until 1984 when Marine Midland successfully
appealed to the Federal Appeals Court. Thus were the legal Luddites of
the third industrial revolution overcome in this particularly significant
instance.
AMERICAN MONETARY DEVELOPMENT SINCE 1700
545
The anachronism of an almost complete ban on formal nationwide
branching remains, bolstered by constitutional inertia, the entrenched
vested interest of most of the existing (and mostly small) banks, and the
all-pervading paranoia concerning banking monopolies (see note on p.
548). However, the experience of California, which has allowed State-
wide branching for most of this century, shows that fears of monopoly
have little substance and proves that small banks can profitably coexist
alongside the giants, provided that freedom of entry remains open. In
this regard the exclusion of the giant money-centre banks from the newly
emerging groupings of States as a result of the bank holding company
interstate compacts has given rise to a concern, shared by the Fed's
chairman, at the 'balkanization' of American banking, with
superregional banks dominating their own region but sheltered from the
strong competition which could otherwise be offered by the large money-
centre banks. Thus already in 1985 Chairman Volcker publicly expressed
his concern regarding such potential balkanization and optimistically
'recommended a federally legislated limit on the number of years that
States could maintain a system of regional interstate banking' {Federal
Reserve Bulletin, February 1987, p. 91).
Although there have been a number of other causes for the relative
decline in the world ranking of America's money-centre banks in recent
years, such as Third World debts and the rise of Japanese banks, there
can be little doubt that the balkanization of domestic banking has played
its part. In 1970 the ten largest banks in the world were all American. By
1980 only two American banks remained in the top ten, BankAmerica
Corp being second and Citicorp being third. In June 1991 according to
The Bankefs list of the world's top twenty banks, ranked by capital,
there were no American banks of that size, Citicorp being ranked twenty-
first. When ranked by assets Citicorp came eighteenth. The next largest
American bank, BankAmerica Corp, was ranked thirty-fourth by capital
and forty-third by assets. One can hardly quarrel with that publication's
conclusion: 'the absence of full nationwide banking is seen as an obstacle
to building global giants' {The Banker, June 1991, p.16). On the other
hand, compensating for the disappearance of American banks from the
world's top twenty and highlighting the preponderant weight of
American banking in world terms is the fact that, in The Bankefs list of
the top 1,000 banks in the world (July 1991), there were far more banks
from the USA, at 203, than from any other country. Japan had 109 (with
six in the top ten); Italy had 103 (none in the top ten); Germany 84 (none
in the top ten); Spain 36 (none in the top ten); the UK 35 (two in the top
ten); Switzerland was strongly represented for such a small country, with
32 (one in the top ten); while France had 24 (also with one in the top ten).
546
AMERICAN MONETARY DEVELOPMENT SINCE 1700
Furthermore despite the rise in the failure rate of US banks the continu-
ing vigour of its banking industry and the 'animal spirits' of its financial
entrepreneurs are evident from the bottom line of table 9.4, which shows
that, in the sixteen years from 1977 to 1992 inclusive, 3,590 new banks
were formed - that is about six times the number of existing authorized
banking institutions in the United Kingdom. As many as 400 new banks
were formed in the USA in the one year, 1984, with an annual average of
over 224 for the sixteen years shown. The birth rate of American banking
- in terms of numbers of course, not size - vastly exceeded the death rate,
speaking volumes not only for ease of entry as a weapon for contesting
monopoly but also for the persistently optimistic belief, despite gloom,
doom and losses all round, that banking is still seen as a licence to print
money - for the proprietors as well as for the general public.
Summary and conclusion: from beads to banks without barriers
For the first three-quarters of the eighteenth century America's
monetary development was kept on such a taut lead by England that it
was forced to make indigenous products like wampum, furs, maize and
tobacco into limited legal tender. In such circumstances the drain of
precious metals to pay taxes was felt so keenly as to play its part in the
Revolution. Freedom to print the paper money with which the
Revolutionary War was financed was carried to excess as, with the
debauchery of the 'Continentals', America first experienced runaway
inflation, causing the States to concede to central government the right
'to coin money and regulate the value thereof. The States were left with
rights over the unofficial types of bank-issued moneys, thereby giving
rise to the dual system which has, on balance, plagued its monetary
development thereafter. State-federal rivalry destroyed the First and
Second 'Central' Banks and left the American banking system
rudderless against the violent storms of the nineteenth century. During
the Civil War while the lax financial policies of the South led again to
runaway inflation, the North through greater fiscal and financial
rectitude experienced only moderate inflation. During most of the
nineteenth century the obvious benefits of sound money were achieved
by de facto adherence to the gold standard just when, luckily, supplies
of newly mined gold were increasing. The USA avoided, but only just,
becoming ensnared in the irrelevance of bimetallism, though not until
1900 was the gold standard enshrined in law. Unfortunately without a
central bank even the gold standard failed to provide enough 'elasticity'
to the money supply. It was in order to supply such elasticity that the
AMERICAN MONETARY DEVELOPMENT SINCE 1700
547
Fed was finally established in 1913, adopting a regional structure for
that purpose just when modern communications were bringing about a
potential nationwide market for money.
America's fatal attachment to unit banking, coupled with the Fed's
restrictive monetary stance, intensified the world's biggest slump in the
1930s and fatally weakened a third of America's banks. The reforms then
introduced, separating investment from commercial banking and
establishing an exemplary deposit insurance system, seemed justified by
thirty post-war years of safe and expanding banking at home and abroad,
marred only, it seemed, by moderate inflation. Eventually rising inflation
and ingenious innovation broke down a system basically dependent on
usury laws and legal barriers, forcing officialdom to accept widespread
functional deregulation and some forms of interstate and regional
banking in preference to traditional unit banks. Deregulation
accompanied and was followed by (without necessarily implying a causal
connection) an alarming rise in bank and thrift failures, prompting a
rising chorus of calls for fundamental reform in the 1990s.
America in 1991 boasted 362 large 'billion-dollar' banks, yet most of
the other 12,000 banks were quite small by international standards,
protected from competition by an irrational fear of monopoly and by
the one large remaining physical barrier prohibiting nationwide
branching. This will surely be further undermined if not removed —
possibly by allowing branching throughout each Federal Reserve
District, as a stage on the way to ultimate geographic freedom
nationwide. Consequently it is not unlikely that as the twentieth
century comes to a close the USA will experience the biggest merger
boom in world banking history as 12,000 banks furiously coalesce, in a
nation at last without banking barriers. The Garn-St. Germain Act of
1982 allowed banks to cross state boundaries to acquire failing banks,
while the Riegle-Neal Interstate Banking Act of 1994 and the Financial
Services Modernization Act of 1999 further eroded the legislative
constraints that had previously limited their growth.
As it turned out, the latest figures (from the 87th Annual Report
of the Board of Governors of the Federal Reserve System, June 2001,
p. 355) show that the total number of banks on June 1st 2000 came to
8,450, of which 5,155 were non-members of the Fed. and 3,295 were
member banks, comprising 2,300 'National' and 995 'State' chartered.
In just fifteen years, from a peak of 14,483 in 1985 the total number of
banks had fallen by over 40 per cent. This fall, despite the very
considerable compensating growth of 'non-bank' competition, gave rise
to much concern among some economists and lawyers, sensitive to the
feared monopoly power of greater bank concentration.
548
AMERICAN MONETARY DEVELOPMENT SINCE 1700
Note
Bank Concentration Ratios The two most popular measures of banking
monopoly in the USA are: (a) the 'Three-Bank Concentration Ratio'
(3BC) which simply adds the percentage share of the three largest
banks within a defined geographic banking area; and (b) the
Herfindahl-Hirschman Index (HHI) which is the sum of the squares of the
market shares of all the banks within that defined area. An example will
illustrate why HHI is preferred by the Department of Justice and the Fed in
cases like merger or de novo entry.
The Banksville area boasts eleven unit banks, of which three are large, each
with a market share of 20 per cent, while the other eight banks are small, each
with only 5 per cent of the market.
(a) 3BC = 20 + 20 + 20 = 60%
(b) HHI = 3(202) + 8(52) = 1,400
Now suppose there is a merger between two of the large banks:
(a) 3BC = 40 + 20 + 5 = 65%
apparently indicating only a small increase in monopoly power. On the
other hand:
(b) HHI = 402 + 202 + 8(52) = 2,200 indicating such a large increase, of 800
points, that would cause the authorities to reach for their revolvers.
Thus, according to the official notification of the legal results of an
investigation of possibly excessive monopoly in 1990, the Federal Reserve
Bulletin of April 1990 states: 'Under the revised Department of Justice Merger
Guidelines a market in which the post-merger HHI is above 1,800 is
considered highly concentrated. In such markets, the Department of Justice is
likely to challenge a merger that increases the HHI by more than 50 points'
(p.249).
Dangerously Hidden Cost of Legal Constraints Despite legal rearguard
actions, the rising tide of mergers has continued relentlessly to sweep away
traditional barriers and to expose the naivety of conventional anti-
monopolistic attitudes. Outstanding examples during 1995-6 included the
marriage of Chase Manhattan and Chemical in New York City to form
America's largest bank; and the inter-state merger of First Chicago with NBD
of Detroit. Reluctantly, step after grudging step, the legal authorities have
been forced to recognize the economic logic of the domestic and international
financial markets. Such needless delays impose a considerable hidden cost in
holding back the long-term growth of America's huge gross national product
below its potential rate. (For a more recent and detailed assessment of bank
concentration ratios see N. Cetorelli in Economic Perspectives, Federal
Reserve Bank of Chicago, 1st Quarter, 1999.)
10
Aspects of Monetary Development in
Europe and Japan
Introduction: banking expertise shifts northward
Only the briefest glimpse can be given here of some of the salient
features of the development of money and banking in parts of
continental Europe since about 1600 and in Japan during the nineteenth
and twentieth centuries. Special emphasis will be given to the close
attention which the banks and the monetary authorities have continued
to give to industrial and regional development when compared with the
situation elsewhere, and in particular the United Kingdom. One of the
most persistent and intrusive factors influencing the growth of
monetary institutions, instruments and policies over most of Europe,
which tended to bring some degree of similarity to its almost infinite
regional variety, came from outside Europe. International trade
provided the resources for which European nations and city-states
competed vigorously by economic and military means, for at that time,
war - to modify Clausewitz - was the continuation of monetary policy
by other means. 'Nowadays that prince who can best find money to pay
his army is surest of success' (Davenant 1771, 348). 'There is no
question', wrote Professor Lipson 'that the mercantilists attached
importance to the precious metals largely as an instrument of war'
while 'the imperfect development of credit instruments gave greater
prominence to precious metals' (1956, III, 67-8). The great
geographical discoveries and their associated military conquests, as
noted in chapter 5, moved the centre of gravity of banking expertise
northwards from the Mediterranean, and especially from its Italian
cradle, to France, the Germanic states and to those persistent rivals in
the search for and control of the spice trade, England and Holland. By
550
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
the end of the seventeenth century the latter two countries had become
the most financially advanced and were 'the only countries where
anything except coined money made a really significant contribution to
the internal money supply outside the few favoured cities' (Spufford
1988, 396). Although most trade was local and based on silver coins it
was from wholesale and external trade carried on by merchants assisted
by merchant bankers using gold, bills of exchange and other forms of
credit, that the impetus to financial innovation was in the main derived.
The rise of Dutch finance
The importance of the Bank of Amsterdam
Between 1585 and 1650 the increasing involvement of western Europe in
overseas trade led to a rising trend of prosperous economic activity in
Holland, with Amsterdam taking over the key trading position
previously occupied by Antwerp. Amsterdam became the chief
commercial emporium of Europe. Its stock exchange quoted a list of
prices as early as 1585. Important new companies, such as the Dutch
East India Company of 1602 and the West India Company of 1621,
provided the financial backing for Dutch political and economic
competition with England in the Far East and in the New World,
involving the control of the spice trade in the former area and of the
town and colony of New York in the latter. A Dutch 'corner' in pepper
raised its price in London from 35. to 85. per lb in the first decade of the
seventeenth century, and only strenuous action by the English East
India Company managed to bring the price back down to 2s. by 1615.
Although trade in exotic products was thus subject to strong
monopolistic elements, when it came to currencies and the precious
metals Holland led the world in providing the clearest example of the
benefits of free trade.
The Dutch authorities produced two forms of currency: an internal,
inferior (slightly) but perfectly acceptable form designed purely for
domestic use with a silver content made lower than its face value to
discourage export; and secondly 'trade coins' of such a high intrinsic
quality that they were eagerly accepted as a most popular international
commodity money. 'Just as the Florentine florin and the Venetian Ducat
are said to have been the dollars of the Middle Ages, it could be said
that Dutch currency became the dollar of the seventeenth century'
(Vilar 1976, 205.). Early in that century fourteen mints operated in
Holland to supply such currencies, later merging into eight. Trade was
vitally dependent on the fast and efficient handling of the foreign
exchanges of coins and of bullion, and it was for this reason above all
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
551
others that the public Bank of Amsterdam was established in 1609 to
give a superior and more controlled service than was available from the
host of private exchangers and 'bankers' that had been springing up
over much of north-west Europe. It soon developed an international
reputation, not only as an exchange bank but also as a deposit bank,
though such deposits were of a wholesale size, suited to the needs of the
rich merchants, states and municipalities that were its customers. It was
not a bank of discount, nor in its early years did it make loans to the
general public, though, exceptionally, it did grant loans to the East
India Company and to the larger Dutch municipalities. We have seen
how its example led to the establishment of the Bank of England, which
gradually gained international precedence. All the same, Adam Smith
was constrained to sing the Dutch bank's praises in his famous
Digression in his Wealth of Nations on 'Banks of Deposit, Particularly
that of Amsterdam'. Smith's views of the fundamental role played by
the Bank of Amsterdam in modern monetary development are
confirmed by recent writers.
Smith showed how the Amsterdam bank 'gave a credit in its books'
for deposits of coin, whether domestic or foreign. 'This credit was
called "bank money" which, as it represented money exactly according
to the standard of the mint, was always of the same real value, and
intrinsically worth more than current money', which was subject to fair
and unfair wear and tear (1776, Book IV, 422). He went on to say that
such 'bank money' carried a premium or agio over coinage and was far
more convenient than bullion for most purposes: 'The Bank of
Amsterdam has for these many years past been the great warehouse of
Europe for bullion' (p.427). Vilar similarly, in his stimulating Gold and
Money devoted a chapter to 'The Monetary Role of the Bank of
Amsterdam', and concluded that the bank 'was for a long time an
essential part of the monetary system of Europe and indeed of the
world' (1976, 210). The Dutch were teachers of banking and of business
to the seventeenth-century world. In Holland, said Smith, 'it is
unfashionable not to be a man of business' (Book I, 86). Nevertheless it
is ironically apt that the Dutch also supplied the modern world with its
first example of widespread business mania.
The Dutch tulip mania, 1634-1637
Futures markets in exotic products like tea and pepper had become
firmly established in Holland during the first quarter of the seventeenth
century. It was however in connection with the domestic production of
a previously exotic import - the tulip - that the world's first nationwide
mania, based on bulb futures, took place in the 1630s. The first
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ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
shipment of tulips to arrive in the Low Countries was brought into
Antwerp from Constantinople in 1562 and soon formed the basis for
the later development of the enormously lucrative bulb industry of that
region. Rarity naturally led to high prices for distinctive varieties,
especially after the blooms had become highly fashionable in Paris
society in the early 1630s. Particularly esteemed were the flamed,
double-coloured and striped blooms. These striata or 'sports' were (as
we now know) caused by a virus carried in the bulb and its excrescences
or 'buds', but not in the seeds. This limited the extent to which supply
could respond to a particular surge in demand. Whereas other futures
markets were generally limited to experts and specialists, futures in
bulbs and their 'buds' were comprehensible and available to the
common man, in fact anyone with a few square yards of ground.
Professor Posthumus, one of the few economists to have made a
thorough study of the tulip mania, states that 'the proximity of
Amsterdam, with its commercial and speculative spirit, to Europe's
main bulb-growing region was certainly a very powerful stimulant' for
the rising speculation which grew from 1634 onwards to the climax of
1636-7 (Posthumus 1929, 435).
Cycles of rising and falling prices for bulbs have continued ever since,
as has recently been painstakingly demonstrated by Peter M. Garber in
what is claimed to be 'the first serious effort to investigate the market
fundamentals that might have driven the tulip speculation' (1989, 535).
Professor Garber even raises the question 'Was this episode a
"Tulipmania"' (p.555). On balance however there is no escaping
Posthumus's conclusion that 'this fluctuation would do very well as an
example of the "psychological" theory of business cycles' (p.449).
Holland was enjoying a period of considerable prosperity in the 1630s.
The tulip offered a timely outlet for the general financial euphoria, in
which from 1634 onwards the ordinary person could add his demand,
so greatly swelling the normal speculative wave. Even the poor could
join the tulip craze, which needed 'none of the involved and, to them,
awe-inspiring technical and financial complications which accom-
panied a deal in spices or in shares of the East India Company' (p.449).
The volume and speed of bargains increased rapidly. Whereas the
expert bulb growers customarily drew up legal contracts, signed by
notaries, regarding prices, payment and delivery dates, the non-experts
arranged markets called 'colleges' in inns and taverns, drawing up their
own laxer rules regarding such matters. Payments were often a mixture
of cash, credit and payment in kind including cattle, wheat, housing,
paintings, silver ornaments, barrels of beer and so on. The public's
appetite was whetted by well-publicized examples of bulb prices
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
553
increasing twenty times during the short auction season, with a few
cases recording a two-hundredfold increase. Total sales in just one town
were valued at ten million florins. In an inflationary age like ours it is
not possible to give exact valuations in current money of the astronomic
heights to which certain bulbs, including common strains, rose (on
paper, mostly) at the height of the mania. The 'degeneration of
speculation into a pure craze may be placed', according to Posthumus,
'in the autumn of 1636' (p.443). Garber more precisely dates what he
calls the 'potential bubble' to 'the period from January 2 1637 to
February 5 1637' (1989, 555). Professor Kindleberger gives the highest
price for a single bulb as the equivalent of £20,000, quoting a 1927
source — probably a very considerable underestimation on current
prices (1984, 215). Professor Garber in his serious, factual study
dismisses as illogical the droll story of the hungry seaman, who
mistaking a valuable (but unguarded) tulip for an onion, indulges
himself in the world's most expensive snack. History however laughs at
logic, so that the Dutch mania cannot thus escape the possible
operation of Murphy's law.
If this was not 'mania', there never has been any. It remains as clear as
day that the Dutch experience certainly justifies Posthumus's
'psychological' interpretation. Just a week after the frenzied peak
reached in the first week of February 1637 the bubble suddenly burst,
confidence vanished and prices plunged to one-twentieth or less of
those recorded a few days earlier. The abrupt ending of the boom was
followed by a long period of a year or more of adjustment, when a series
of voluntary agreements were made, with municipal guidance, to limit
the damage. Doubt was cast on the legality of many of the dealings,
which being interpreted as gambling were not strictly enforceable in the
courts. Many could no longer raise the credit which had grossly inflated
nominal debts. Mutual debt cancellations were arranged, with,
typically, cash payments of 3.5 per cent of peak nominal values being
commonly accepted in final settlement. The modern world's first
financial mania, based on a sound and growing industry, and liberally
supplied with plentiful and new kinds of credit, thus subsided with
surprisingly little economic damage. It had encouraged participation by
a larger proportion of the ordinary population of a nation than any
other mania up to the Wall Street boom of 1929. Finally it showed the
world that the much admired financial sophistication of the Dutch
could be carried to excess - a lesson almost every generation has
subsequently needed to relearn for itself, ever since 'bank money'
greatly expanded man's ambitions.
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ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
Other early public banks
Although Britain and Holland, as eager apprentices of Italian
financiers, led the way in the development of modern banking in the
seventeenth and eighteenth centuries, similar developments were
spreading throughout the most of Europe, even in areas previously
financially backward. In the same year as the Bank of Amsterdam was
formed a similar public bank was formed in Barcelona (1609). Other
Dutch banks were set up shortly afterwards including those of
Middelburg (1616), Delft (1621) and Rotterdam (1635). Meanwhile the
Hamburg Girobank (1619) and the Bank of Nuremberg (1621) showed
how the trend towards publicly owned banks was spreading to
complement the older private banks, such as those of the Fuggers, first
set up in Augsburg in 1487. Of particular interest is the Bank of Sweden,
granted a most liberal charter in 1656. This authorized it to accept
deposits, to grant loans and mortgages and to issue bills of exchange. It
became the first chartered bank in Europe to issue notes, which it began
in 1661. However, in 1668 it ran into difficulties, but had already
become recognized as so important that it was rescued and reorganized
as the Riksens Standers Bank, later called more simply the Riksbank or
Bank of Sweden. It then became the world's first central bank and a
partial model for later note-issuing central banks (notably the Bank of
England). It remains the world's oldest existing public bank. By the end
of the seventeenth century there were at least twenty-five public or semi-
public banks offering an increasing range of services in various parts of
Europe including areas previously dependent on foreign agents or
private quasi-banking institutions. According to an exceptionally
widely experienced banker of that period, Sir Theodore Janssen, one of
the founders and a director of the Bank of England, such banks arose
from a mixture of motives, including 'Safety, Conveniency and Income'
(Heckscher, in Dillen 1934, 169). Convenience, security and profit have
remained the main motives in different mixtures for setting up banks
ever since.
In time the early public banks were vastly outnumbered by the
relatively unsung private banking institutions which grew to be far more
important in terms of their influence on the economic development of
their communities than the public banks, particularly in supplying the
credit demands of the business community. In general it may be said
that the private banks were the main agents responsible for the increase
in the quantity, whereas the public banks were more concerned with
maintaining or enhancing the quality, of money. The public banks were
much larger, gained greater prestige and were more involved with
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN 555
governmental and municipal loans, i.e. with public debt, than most
private banks. A number of public banks were set up from their
commencement to carry out what were later considered to be essentially
central banking functions, while others eventually acquired such
functions, some very belatedly. Russia's two first public banks, both
banks of issue, were formed by Catherine the Great in 1768 to finance
her wars with Turkey. The Russian State Bank, with wider functions,
was not set up until 1860, while in countries like Germany and Italy
central banking had to await political unification in the 1870s. Even in
France, the largest and most politically powerful European state of the
eighteenth century, not only public banking, but almost all modern
types of banking, suffered from painfully slow and weak development,
especially when compared with that of Britain and Holland.
France's hesitant banking progress
France's first venture into public banking was instigated by John Law
(1671—1729). He was born in Edinburgh, where his father was a
goldsmith and banker. The son showed an early proficiency in
mathematics and worked in his father's bank from the age of fourteen
until seventeen, when his father died. He then moved to London and got
involved in a duel with a certain Mr Wilson, whom he killed. He
escaped from prison by fleeing abroad, living in France, Holland,
Germany, Italy and Hungary, profiting from his gifts for speculation
and gambling, but also making a serious study of money and banking.
After some ten years' absence he returned to Scotland where in 1705 he
published his unconventional but inspiring ideas in a book entitled
Money and Trade Considered: With a Proposal for Supplying the
Nation with Money. Metallic money was unreliable in quantity and
quality, often inflicting restraints on trade. Banknotes, issued and
managed by a public bank, were superior and would remove the harsh
brakes imposed by an insufficient supply of precious metals. 'National
Power and Wealth', he wrote 'consists in numbers of people and [stores]
of Home and Foreign Goods', which stores of goods in turn 'depend on
Trade and Trade depends on Money'. But only banker-created money
ensures a sufficiently active supply. 'By this Money,' he explained, 'the
People may be employed, the Country improved, Manufacture
advanced, Trade Domestic and Foreign be carried on, and Wealth and
Power attained' (Vilar 1976, 249-50). His ideas were rejected in his own
country but, after he returned to France in 1713 and gained the ear of
the Duke of Orleans, were eventually put into practice, largely because
of the parlous state of French public finance.
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ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
Despite the fiscal reforms of Richelieu, Mazarin and Colbert, the
costly wars and conspicuous extravagance of Louis XIV and his court
had by the time of the king's death in 1715 crippled the nation's
finances and placed the duke, newly created Regent of France, in an
impossible position. The government's annual expenditure was running
at more than twice its annual revenue, while the vested interests and
tardy procedures of the tax farmers caused the gap between
expenditure and revenue to widen. Attempts to gain immediate funds
were made by the issue of state promissory notes [billets d'Etat) but
these fell to one-quarter of their face value within the year. In
desperation the Duke of Orleans turned to Law. 'No other "Keynesian"
ever had such a golden opportunity' (Kindleberger 1984, 97).
Law's first step was to economize on the use of precious metals by
establishing a note-issuing bank. Law & Co., or the Banque Generate as
it became known, France's first public bank, began operations in June
1716. At first it was a great success. In contrast to the state's short-term
paper, Law's banknotes actually appreciated, by 15 per cent by 1717. To
mark its success (and to be able to place these lucrative note issues more
directly under his own influence) the Regent reorganized Law's bank
into a newly chartered Banque Royale in 1718. The temptation to
overissue, held in check for a while, was later to become only too
apparent. However, the state was now much less dependent on the Tax
Farmers who, resenting the loss of their influence and even more of their
income, bided their time to wreak vengeance on Law. As well as
establishing a bank and solving, temporarily at least, the state's fiscal
problem, Law's 'system' had a third vital element, namely the sale of
shares in a company to tap the seemingly limitless wealth of the French
colonies, especially those of the Mississippi basin or Louisiana.
Frenchmen and foreigners clamoured to buy shares in the Mississippi
Company, which was inaugurated in August 1717. In 1719 it was also
given the monopoly of trade with the East Indies and China and was
merged with the French East India Company, which had been formed by
Colbert in 1664. Law's 'system' thus became in effect a vast state trust
controlling banking, the national debt and a great part of the country's
foreign trade. For a while the system worked with startling success and
the nation, as well as the speculators, prospered. Law himself made a
fortune, and after conversion to Roman Catholicism was made
Minister of Finance. However by the spring of 1720 the overissue of
notes, combined with excessive speculation in the shares of the new
companies, led to a drain of precious metals from France to London
and Amsterdam. On Law's advice the Regent attempted to stem the tide
by enforcing payments in notes only, while maximum personal holdings
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
557
of coin were to be limited to 500 livres. These were totally unworkable
controls. The tax farmers saw their opportunity and forced the Regent
to dismiss Law on 27 May 1720. On the same day the Banque Royale
stopped payment. The Mississippi Bubble had burst and Law's system
had gone into reverse. Law left France and nine years later died in
poverty in Venice. Thus ended, in Adam Smith's judgement 'the most
extravagant project both of banking and of stock-jobbing that, perhaps,
the world ever saw' (1776, Book II, 283). The world's appetite for such
spectacles has sadly remained insatiable; but Frenchmen turned away
from banking, not only in name but to a large part also in substance,
for a hundred years or more - with just one important exception, the
Bank of France.
It was not until fifty-six years after the failure of Law's venture that
Parisians dared contemplate another public note-issuing bank, and even
then the lead was given by two foreigners, Panchaud, a Swiss, and
Clouard a French-sounding Scot. Their Caisse d'Escompte was formed
in 1776 and, after enjoying ten successful years, began treading the
slippery slope of granting too many loans to the government,
accompanied by excessive note issues, until it was forced into
liquidation in 1793. Two other stop-gap banking institutions followed
in 1796 and 1797, the Caisse des Comptes Courants and the Caisse
d'Escompte de Commerce, with similarly short careers until they were
absorbed by the Bank of France in 1800 and 1803 respectively. The bills
of these public discounting houses and of the many private houses
supplemented a growing flood of state paper issued by the hard-pressed
revolutionary governments in the eleven years from 1789 to 1800. The
most notorious of such issues were those of the assignats. One of the
first acts of the revolutionary government in November 1789 was to
take over the ownership of Church lands, and on the basis of this
security to issue bonds carrying 5 per cent interest, with purchasers
being 'assigned' on redemption a portion of land to the value of the
bond. The idea of land being sound security for bond and note issues
was not new - as we saw in the many rival schemes when the Bank of
England was set up. But the French government's pretence of allocating
the ownership of particular plots of land, together with the privilege of
5 per cent interest was soon abandoned, and the assignats simply
became state-issued, inconvertible fiduciary notes.
At the same time as the total issues mushroomed, the denominations
of individual notes were widened from the original typical 1,000-livre
note of 1790 down to notes as small as 5 livres by the following year.
There followed the usual consequences: inflation, dual pricing (with
note payers forced to give more than coin payers), the hoarding and
558
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
practical disappearance of coins, the flight of capital abroad, followed
by even greater issues of assignats in a vicious spiral. The original issue
of 800 million livres in December 1790 climbed rapidly through an
estimated circulation of 8 billion livres in December 1794 to a peak of
20 billion officially estimated on 23 October 1795, by which time the
nominal 100-livre or newly designated 100-franc notes could be
exchanged, if at all, for only 15 sous in coin. The Paris riots of April and
May 1795 paved the way for the rise of Napoleon — and for his Bank of
France as an essential agent for re-establishing sound finance. The
inflationary trauma of the assignats reinforced the French public's
painful memories of Law's banking experiments, strengthened their
atavistic attachment to silver and gold, and with good reason confirmed
their primitively cautious and conservative attitudes towards paper
money and the banks that issued it. However, with its belated
foundation in 1800 the Bank of France at last supplied the nation with
the kind of public financial institution that its neighbours in England,
Holland and Sweden had been enjoying for a century or more.
The Bank of France's monopoly of note issue was confined to the
Paris region until 1848. The rest of the country was in the main forced
to depend on the note issues and bill discounting of local banks, most
of them weak, unit banks, with all of their eggs in their local basket.
The Bank of France and the government between them followed a
vacillating policy, sometimes supporting and at other times opposing
local note-issuing banks. Most local notes were unacceptable outside
their own districts. Large numbers of local banks failed in the crisis year
of 1847 and in the revolutionary year of 1848. To fill the gap the Bank of
France was given a complete, nationwide monopoly of note issue in
1848 and also began to expand its branch numbers, which grew to
thirty by 1852 and to fifty-four by 1867. The late 1890s saw a renewed
surge, so that by 1900 the Bank of France had some sort of office
representation in 411 towns throughout France, with as many as 120
being full branches - compared with just eight Bank of England
branches in Britain. As Francois Caron explains, 'by the beginning of
the twentieth century the role played by the Bank of France in the
banking and monetary system was relatively more important than that
of the Bank of England'; and then, more revealingly still, he adds, 'or to
put it differently, the role of the other banks was much less important
than that of comparable institutions in England' (1979, 50-1). This
view as to the comparative dominance of the Bank of France is
authoritatively confirmed by the researches of Jean-Pierre Patat and
Michel Lutfalla who show that 'the French banks experienced a less
vigorous development than their English or German counterparts'
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
559
being more dependent on their central bank than was the case in other
countries' (1990, 14). From being a gap-filler, the Bank of France had
become a cuckoo in the regional nests.
Because nineteenth-century France exhibited the wide contrasts
typical of a dual economy (i.e. with selected areas and cities enjoying
relatively advanced facilities when other areas, many of them quite
large, remained backward) it has been common for different authorities
to paint starkly contrasting pictures of French economic development.
An official report of 1840 described French agriculture (by far its main
employer) as 'stagnant, backward, even primitive'. 'French agriculture
in 1850 in most regions was still producing for self-subsistence' (R.
Price 1981, 48, 61). Further proof of the duality of the financial system
is shown by the fact that, until the 1850s, credit in Paris could fairly
readily be had at 2.5 or 3.0 per cent, whereas credit in the countryside,
much of it still supplied by the country's 10,000 notaries, cost between 7
and 9 per cent. According to Professor Caron 'even up to the 1860s
large areas of France were still deserts as far as money was concerned'
(1979, 54), while he goes on to conclude that 'the duality of French
growth in the first two-thirds of the nineteenth century is clear' (p. 136).
Even when local banks were supplemented by branches of the Bank of
France their notes were of little or no use to the vast majority, who clung
tenaciously to their precious coins. Until 1846 the minimum legal
denomination for banknotes was 250 francs, equal to more than a
month's wage for the average worker. Although the minimum was very
gradually reduced, it was as slow and difficult a process to wean the
public from coins to notes, as it was to wean the businessmen from
notes to bank deposits and cheques. Not until 1865 was the law on the
use of cheques simplified enough to encourage more widespread use.
Consequently reliance on coinage and banknotes remained far higher in
France than in Britain, Germany or the USA, with the Bank of France
having to amass large quantities of gold in its sterile reserves to back up
its vast note issue. As late as 1903 total bank deposits came to only
about one billion francs, i.e only one-tenth of the money supply,
compared with a circulation of over five billion in coins. Little wonder
that France used its love of gold and silver to lead world opinion in the
bimetallist fallacy and to push through the Latin Union from 1865 (as
shown in the previous chapter).
Professors Patat and Lutfala demonstrate the extent to which France
had an 'outmoded monetary structure' when compared with that of the
UK or Germany, in which countries bank deposits were respectively five
times and twice as large as the total in French banks. Banknote
circulation in France at the end of the nineteenth century was eight
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ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
times larger than the Bank of England's fiduciary issue and twice that
of Germany, and while the Bank of England's gold reserves, despite
having to back the role of sterling as a world currency, were relatively
very small, those of the Bank of France typically exceeded even its vast
total of note issues. In France gold was needed to support its hand-to-
hand currency rather than to furnish the foundation for a multiple
expansion of bank credit. Whereas Britain had erected an inverted
pyramid of bank credit upon a small gold base, with open market
operations and bank rate impinging on the bank multiplier to bring
about the desired variations in the quantity and price of credit, France
built a more stolid, columnar structure resting on a broad base of gold,
with far less use of open market operations or of variations in the rate
of discount. The Bank of France hardly ever changed its discount rate in
the first half of the nineteenth century, being fixed at 4 per cent from
1817 to 1852, except for the revolutionary period in 1848. Even at the
turn of the century it remained far less flexible than elsewhere. Between
1898 and 1913 the Bank of England's rate was changed seventy-nine
times, and that of Germany on sixty-two occasions, while that of the
Bank of France was changed only fourteen times and then only within
the narrow range of 2 to 4 per cent. Because the French monetary and
banking system thus differed considerably from that of Britain the use
of central banking's two traditional weapons was obviously less
appropriate. However, the Bank of France, with its preponderant
weight and usually with the co-operation of the big Parisian banks,
could and did frequently intervene directly to select the sectors and
areas where it felt help was needed.
Turning now to the commercial banking scene, it is apparent that,
particularly in the first half of the nineteenth century, French industrial
development, with few exceptions, received little support from its
banking system, not only from a lack of long-term loans but also from
a dire shortage of working capital. This situation began to change
substantially for the better in the third quarter of the nineteenth
century. France's first, effective, major bank specially set up to provide
investment funds for industry and the infrastructure was the Credit
Mobilier, formed by the brothers Emile and Isaac Pereire and a group of
other bankers, with a large initial capital of 60 million francs, which
began operations in December 1852. There had been a few earlier,
weaker, attempts to create such a bank, modelled partly on existing
banks, like Rothschilds (for whom Emile Pereire had previously
worked), and partly on the Belgian Societe Generale, which had been
founded in 1822 and had played a vigorous role in Belgium's industrial
revolution - the first on the European mainland. Another predecessor
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
561
was the Caisse Generale du Commerce et de Plndustrie, displaying its
objectives in the title. It led a troubled life from 1838 until its demise ten
years later. Although the Credit Mobilier was also destined for a short
life of fifteen eventful years, from 1852 to 1867, it symbolized a
dramatic change in French banking history.
During this third quarter of the nineteenth century the French
people's considerable savings were channelled far more effectively than
ever before into essential investments in transport, communications,
agriculture and industry by means of a whole host of new financial
intermediaries. As well as the Credit Mobilier these included: the
forerunner of the Comptoir Nationale d'Escompte de Paris, originally
one of sixty-six emergency discount offices set up by the government
during the crisis of 1848; the Credit Foncier (1852) to supply mortgage
finance to support the building boom of the Second Empire; the Credit
Industriel et Commercial (1859); the Credit Agricole (1860); the Credit
Lyonnais (1863), the largest of the regional banks; the Societe Generale
pour Favoriser le Developpment du Commerce et de Plndustrie en
France (1864) - again no doubt about its objectives - and the Banque de
Paris et des Pays-Bas, formed with Dutch assistance in 1872. These now
supplemented and competed with the old private 'Haute Banque',
mostly Jewish merchant banks like Rothschilds, Lazards and Banque
Worms, in financing the growth of heavy industry, in the building of
ports and harbours and above all in the construction of the railway
system. As Roger Price shows, 'the most significant investment activity
of the banks was undoubtedly railway finance . . . closely associated
with investment in, and continuous short-term loans to, heavy industry'
which involved 'the interlocking directorates of a whole series of major
banking, railway and heavy industrial companies' (1981, 156). By the
development of the railway and the telegraph, the Parisian and regional
banks were enabled to expand their branch networks so that the
previously fragmented, separate local economies could now begin to
operate as a truly national market, a fact signalized by the opening of
the Paris Clearing House in 1872 - one hundred years later than that of
the London Bankers' Clearing House. Professor Kindleberger, having
carefully considered recent views to the contrary, is in no doubt that, in
matters of money, banking and finance, France was in general a
hundred years behind Britain, and that this had significantly held back
its economic development (1984, 115).
We have seen, in chapters 7 and 8, that, contrary to conventional
opinion, British banks played an important investment role in the first
industrial revolution through supporting the local, small-scale
industrial firms typical of that period by granting what were in effect
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ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
medium- and long-term loans through customarily renewing nominally
short-term loans. However, just when the banks in France, and even
more so in Germany, were forging their close links with industry and
strengthening the regional bases of their financial institutions, the
British banks were loosening their ties with local industry, strictly
avoiding becoming entangled in medium- and long-term lending, and
began centralizing financial flows and decision-making in London.
Partly as a consequence the failure rate of the British banks declined -
as did the growth rate of British industry together with Britain's long-
held lead, economically and financially, over its continental rivals. In
France the failure of banks like the Credit Mobilier, which took in
short-term deposits and lent out as long-term, led to a tendency for
deposit-taking banks to separate themselves from the 'banques
d'affaires' or investment banks, although it was not until after the
Second World War that this distinction was, as a seemingly sensible
safety measure, legally enforced. One complaint commonly heard in
France under the term 'drainage' was the diversion of domestic savings
away from internal investment in industry towards government funds
and foreign investment, increasingly so in the period from 1870 to 1914
- a faint echo of the much stronger diversionary flows in Britain.
There are two outstanding areas of finance where French institutions
gave a lead to Britain and grew in the twentieth century to become the
largest, or among the largest, in the world, namely agricultural credit
and postal money transmission. The old Credit Agricole, first formed
in 1860 as an off-shoot of the Credit Foncier, was radically
reconstructed in 1894 into a three-tiered system. First came thousands
of local institutions, the Caisses Locales, each of which was linked to
the second tier, the Caisses Regionales, of which there were originally
about one hundred, though the numbers fell with interregional
amalgamations. Finally these were joined to the Caisse Nationale de
Credit Agricole which still has a million or more customers despite the
drastic decline of the total numbers working in agriculture. During the
early 1980s the Credit Agricole was classed as the world's largest bank.
The annual ranking given by The Banker oi July 1991 places only four
European banks in the top ten (the other six being Japanese). Credit
Agricole came sixth, just behind the Union Bank of Switzerland,
compared with Barclays in eighth position and National Westminster in
tenth. French farmers are thus backed by the world's largest
'agricultural' bank. The supply of short-, medium- and long-term funds
has thus for generations been made readily available on reasonably
favourable conditions for French farming communities, the designation
'farming' being widely interpreted, providing a financial dimension to
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
563
reinforce France's stubbornly strong political support for the EC's
Common Agricultural Policy, which French politicians had played so
large a part in formulating.
Given the relatively small use made of cheque payments in France
compared with Britain, it was natural that France should have been
more strongly attracted to the advantages demonstrated by Austria's
original postal giro system. Whereas Britain's belated National Giro
was not set up until 1968, that of France was established fifty years
earlier. By the time Britain's giro began, that of France had already
grown to be by far the world's largest, relieving the French commercial
banking system of a heavy burden of costs and supplying a simple
payment system, especially beneficial to poorer persons without bank
accounts, spread throughout the country. Compared with the UK giro's
467,000 accounts in 1972, Western Germany's postal giro, the world's
second largest, had 3,369,000 accounts, while France's postal giro was
easily the world's largest with 7,156,000 accounts, twice that of
Germany and over fifteen times as large as that of Britain - which latter,
as we saw, was still small enough to be swallowed by a building society
in July 1990 (Davies 1973, 195). By 1992 Britain had 2.5 million
Girobank accounts, but France with 8.5 million equivalent accounts
was still, in absolute terms, the world's biggest, though in per capita
terms Holland remained by far the world's most intensive user of postal
giro banking (Bridge and Pegg 1993, 9).
Turning now to review certain salient features of macro-economic
policy closely relevant to financial development, reference might first be
made to the ease with which the plentiful savings of the French nation
were mobilized to pay off the large indemnity of five billion francs
demanded by Germany after the war of 1870. The Thiers government
loan raised for this purpose was more than ten times oversubscribed,
enabling the indemnity to be repaid within three years - a remarkable
tribute to the financial strength of the French economy. This experience
goes some way to excuse both the tendency of the French government to
rely excessively on borrowing to finance the First World War and French
insistence, despite the eloquent warnings of Keynes and the more
taciturn opposition of Montagu Norman, that Germany could and
should pay the massive reparations demanded at the Versailles Peace
Conference of 1919. Overborrowing at short term and excessive
reparations had important consequences for European monetary and
banking development. No system of income tax was imposed in France
until the First World War, and then in a most hesitant and piecemeal
fashion, 'In France,' said Keynes 'the failure to impose taxation is
notorious' (1920, 230), thus forcing greater reliance on borrowing. The
564
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
external deficit on the balance of payments was met largely by loans
from Britain and America, while the internal, budgetary deficit was met
by a combination of internal borrowing and expansion of the note
issue. By 1919 note circulation at 34.7 billion francs had grown to more
than six times larger than even its already bloated pre-war circulation of
5.7 billion. The French national debt rose from about 28 billion francs
in 1914 to 151 billion francs in 1918, with half of it in the form of
floating debt. Nevertheless, despite the massive economic and human
losses suffered by France, including 1.3 million dead, the immediate
post-war period was characterized by inflationary euphoria, based on
the belief that Germany would pay the full costs of reconstruction.
The euphoria soon gave way to reluctant acceptance of the grim
realities of the inter-war period. The 1920s saw an international
scramble for gold to re-establish national gold standards, while the next
decade showed the opposite folly of competitive devaluations as
country after country was forced to abandon fixed prices for gold.
Despite amassing vast amounts of gold, it took the French government
until 1928 to achieve its form of gold standard. During most of the
period from 1914 to 1918 the franc had been held, with British and
American assistance, close to the ratio of 5 francs to $1, but by 1924 it
had fallen to 18:1 and by July 1926 it touched as low as 49:1. Raymond
Poincare, during his second premiership form 1926 to 1929, managed to
stabilize the franc by the second half of 1926 and to establish a form of
gold standard within two years of taking office. By mid- 1928 the
country's gold reserves had been built up to 29 billion francs, and with
the franc then worth 1/25 of a dollar again, it seemed strong enough to
go back to gold convertibility. By the Monetary Law of 25 June 1928 a
form of gold standard was reintroduced (at the equivalent franc/dollar
ratio of 25:1) but with the convertibility of Bank of France notes limited
to wholesale transactions of a minimum of 215,000 francs. Silver
convertibility was no longer guaranteed, finally ending France's long,
lingering attachment to bimetallism. Note issues were to be backed by a
gold reserve of at least 35 per cent. At first this posed no problem for
France, though it did to Britain and later boomeranged on France itself.
By September 1931, having withdrawn £200 million from London in the
previous six weeks, the USA and France between them had squirrelled
away 75 per cent of the world's gold stock. By mid-1932 the official
French gold stock (not counting unknown private hoards) had risen to
89 billion francs, treble its size on the inception of its gold standard.
The government's policy in favour of a strong franc lasted in all for
ten years, from 1926 to 1936, but was undermined by competitive
devaluation. The strong franc was good for prestige but bad for French
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
565
exports and for the exports of the Gold Bloc countries that had allied
their currencies to the French franc, including Belgium, the
Netherlands, Switzerland and Italy - a pale reminder of the old Latin
Union of 1865. With the devaluation of the pound in September 1931
and the dollar in April 1933 the pressures on the Gold Bloc mounted.
The devaluation of the Belga in 1935 signalled the imminent break-up
of the bloc. French official gold reserves fell by some thirty billion
francs during the first six months of 1936, lost partly to other countries
and partly to internal hoarding. In September 1936 the gold standard
was abandoned, the franc being devalued by 25 per cent, followed by a
Dutch devaluation by 25 per cent and a Swiss devaluation by 30 per
cent. Later that same month France joined the USA and Britain in their
Tripartite Agreement to stabilize their exchange rates and so begin a
new short-lived period of international managed money until the
cataclysm of the Second World War.
Despite the vastly different military situation facing France in the
two World Wars, the monetary developments were remarkably similar,
with the total money supply in both cases rising by about 300 per cent,
coupled with a relatively greater increase in the supply of banknotes,
which between 1940 and 1945 increased more than fourfold. At the
same time the supply of goods was drastically curtailed as enforced
exports left few goods domestically available to face the expanded
money supply. Nevertheless the rise in inflation was suppressed not only
by a severe wage freeze and by the administrative control of the Vichy
and German governments, but also by a reduction in the velocity of the
circulation of banknotes. With the step-by-step removal of controls
after the Liberation in August 1944 the suppressed inflation was
released, first in a stream and then in a torrent, despite the wholesale
monetary reforms of 1945. Before considering these reforms, an
overview of the growth of the money supply as a whole during the first
three-quarters of the twentieth century is most revealing. Apart from a
few interludes of moderation, as in the Poincare years, French money
supply grew at an almost incredible pace. The researches of Patat and
Lutfalla show that total money supply (M2) in France increased
between 1900 and 1973 by no less than 4,515 times! They highlighted a
most important difference in that 'before the Second World War
monetary growth was for most of the time passive and ineffective, after
1945 it was conscious and its role as a stimulus to the economy was
obvious' (Patat and Lutfalla 1990, 220-3).
By the legislation of December 1945 the Bank of France and the four
largest deposit banks were nationalized, a National Credit Council was
set up and a rigid separation was enforced between deposit and
566
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
investment banks. Given the dominant size of the Bank of France and its
ubiquitous branch penetration, its nationalization, together with that
of the Credit Lyonnais, the Societe Generale, the Banque Nationale
pour le Commerce et l'Industrie and the Comptoir National
d'Escompte de Paris, supplied French planning with a most effective
strong right arm. The National Credit Council, apart from mundane
duties such as controlling the opening of new banks and branches,
supplied a continuous strategic overview of financial developments and
was in a key position to see that its advisory recommendations secured
influential attention. The separation of deposit from investment
banking was a backward move, reflecting the bank failures of the 1930s
and, fortunately for French industrial development, had to be reversed
later. As the pace of post-war inflation grew to crisis levels in the late
1950s the conservative monetary economist Jacques Rueff was asked to
chair a committee which produced its Report on the Financial Situation
in December 1958, coincident with the election of General de Gaulle as
President and with the end of the first year of Europe's boldest
experiment, the founding of the EEC. It was not until 1 January 1960
that the Rueff Committee's main recommendation was carried out,
namely the substitution of a new 'heavy' franc, equivalent to one
Deutsche Mark, for one hundred old francs.
Following the reform of the currency in 1960 further thoroughgoing
improvements were made in the financial system in 1965-7. By a series
of laws the financial markets were liberalized. The rigid barriers
between deposit and investment banking were broken down as both
types of banks began to compete in deposit and lending business over a
much wider range than before. De-regulation was in full swing. The
opening of bank branches was allowed without prior reference to the
National Credit Council and freedom was given for the leasing of
capital goods on hire purchase, while the capital markets were similarly
freed from a number of previous restrictions. New incentives were
provided for personal savings particularly when associated with equity
investments. The life of medium-term paper for business loans,
acceptable for refinancing at the Bank of France, was extended from
five to seven years. Private enterprise became eager to take up these new
supplies of credit as France began to change dramatically into an
'economie d'endettement', an 'overdraft economy'. These financial
changes showed concrete results as France enjoyed a long period of
growth and prosperity amounting to an economic miracle of almost
Germanic proportions and clearly overtaking Britain by around 1970.
Almost two decades later the picture remained similar. Thus the neutral
World Bank Atlas of 1987 gave the following statistics for GNP per
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
567
head: UK $8,390; France $9,950; West Germany $10,940; Japan
$11,330; and USA $16,400. Apart from the similar examples of
Germany and Japan there can be few more powerful illustrations in
world history than French experience in demonstrating the positive role
that banking improvements can make to economic growth when they
form part of a clear-sighted long-range policy of stimulating savings
and steering them skilfully into productive investment. Although there
were other causes for French economic backwardness during much of
the nineteenth century, there can be little doubt that a relatively
undeveloped banking system played a major part. Conversely, although
other factors helped France achieve her economic miracle, there can be
equally little doubt that the improvement in financial institutions and
practices played a key role.
German monetary development: from insignificance to cornerstone of
the EMS
In no other country in the world have money and banking played a
more crucial role than in Germany, its experience illustrating money at
its best and at its worst, and for that very reason providing an
outstanding example, of interest not only to monetary theorists but,
much more importantly, of practical value to politicians and monetary
authorities everywhere. Because Germans for two periods within living
memory have suffered the devastating economic, social and political
effects that followed from the complete breakdown of their monetary
system, the people in general have become highly sensitive to the
dangers of inflation and have therefore accepted, not with evasion or
reluctance, but with ready co-operation, the disciplines imposed by
their central bank to ensure the stability of the currency. Decades of
rising productivity, moderation in wage claims and monetary discipline
worked together to raise the prestige of the Deutsche Mark and the
Bundesbank to the position where they have been able to act as model
and cornerstone of the developing European Monetary System during
the last two decades of the twentieth century. German monetary history
is of pressing topical significance for the western world's largest
economic community - of well over 300 million people. Little wonder
that David Marsh, with pardonable, pointed exaggeration, subtitled his
incisive study of the Bundesbank 'The Bank that Rules Europe' (Marsh
1992).
The most typical and important type of German commercial bank,
economically speaking, is the 'universal' bank with its special emphasis
on and relation with industrial finance. This type of bank did not
568
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
emerge until the second half of the nineteenth century. Such
developments were if anything more belated than in France, but, once
started, proceeded apace. Before then the various German states were
dependent upon private banking houses supplemented by state-
sponsored companies which carried out various kinds of banking
operations usually alongside other trades. First and foremost among
such state banks was the Royal Prussian Seehandlung, founded by
Frederick William I in 1722 to stimulate foreign trade. As well as acting
as a merchant bank it granted credit - in large amounts - to the
Prussian state government, and from the 1770s it also issued notes.
Despite many vicissitudes it became the most powerful credit
institution in Prussia in the first half of the nineteenth century (Born
1983, 28). A number of agricultural credit institutions grew up in the
1770s and 1780s in the form of state co-operatives which granted
mortgages and other credit based on land, mostly to large landowners
to improve their properties and farming operations. The first of these
Landschaftenvias set up in Silesia in 1771. Other state-sponsored banks
with less restricted aims were the Leyhaus Bank of Brunswick (1765)
and the Royal Giro and Loan Bank founded by Frederick the Great in
the same year. This was Germany's first note-issuing bank, later in
1846, becoming known as the Bank of Prussia, and in turn in 1875 the
Reichsbank.
Outside Prussia the most important banking institutions were the
private houses led by the Rothschilds of Frankfurt, which also boasted
the banking houses of Bethmann Brothers and of Metzlers, making it
even then the foremost banking centre in Germany. Secondly came
Cologne with Herstatt (founded in 1727), Oppenheim (1789), quickly
followed by Stein and Schaaffenhausen, both founded in 1790. Third in
general importance but first in terms of the finance of international
trade came the Hamburg houses led by the Englishman John Parish,
with native houses like those of Donner, Heine and Warburg. Most of
these houses became very active participants in financing the building
of the railways not only in Germany but throughout central and eastern
Europe. Despite the qualified successes of the state banking and credit
institutions and the more obvious strengths of the private banks, new
and larger sources of industrial finance were becoming increasingly
essential as the nineteenth century progressed, with fundamental
constitutional and fiscal changes, particularly the Zollverein of 1834
and the Miinzverein of 1857, adding to the stimulation given to
economic growth by improved communications.
At the beginning of the nineteenth century Germany still consisted of
a mosaic of mostly petty states, dukedoms and municipalities each
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
569
claiming some degree of sovereignty, the farcical remnants of what
Voltaire had lampooned as 'neither Holy, nor Roman, nor an Empire'.
Around 1,800 different custom barriers hindered the flow of trade, there
being sixty-seven different local tariffs within Prussia alone. In the
Germanic territories as a whole there were 314 sovereign regions with
some 1,475 imperial knights legally entitled to some degree of fiscal
authority over their manors. Even after the post-Napoleonic settlement
of 1815 had reduced the number of states to thirty-nine, it was obvious
to most, and most obvious to Prussia, that economic progress required
much greater unity. Prussia led the way by abolishing all its internal
customs between 1816 and 1818. Other states, with differing speeds,
followed its example. By 1833 agreement was reached with nearly all the
states to begin a full customs union (Zollverein) as from 1 January
1834. This formed the basis for a much more rapid industrialization of
the German economy than would have been otherwise possible.
According to Helmut Bohme, the founding of the first Kreditbanken
'was an expression of the extent to which the Customs union had
participated in the economic boom between 1850 and 1857' (1978, 34).
Despite the overwhelming strength of this traditional view recent
researchers have attempted to play down the benefits of the customs
union, e.g. R. H. Dumke considers the 'welfare gains' to have been
'relatively small', adding that German trade had already been
expanding from the 1820s while British demand for German goods
provided 'a greater stimulus' to the German economy 'than the
Zollverein' (in W. R. Lee 1991, chapter 3).
Along with a variety of regional weights and measures the German
people had to put up with a confusing plethora of coinages, currencies
and units of account, foreign as well as native. The agreement on the
customs union in 1833 had suggested larger regional groupings for
common currencies arranged around the mark, the thaler, the gulden or
the florin (the latter two usually but not always being the same value).
In 1838 a convention at Dresden established fixed rates of exchange
between the Prussian thaler, used mostly in northern Germany, and the
gulden, widely used in the south, but at the awkward rate of 4 to 7.
Further limited progress towards wider acceptance of the different
currencies followed the grandiosely-named Miinzverein or coinage
union of 1857. German businessmen pressed for the logical solution - a
single, common currency (a telling pointer to arguments in the 1990s
regarding a single currency for the EEC). Eventually — but significantly
not until political union had been achieved - the new Reich of 1871
adopted the gold standard with the mark as its single currency. To
complete the process of monetary union the Bank of Prussia was
570
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
reformed as the Reichsbank in 1875, rapidly absorbing the note issues
of some thirty other state banks and replacing them with its own notes.
A single kingdom, a single currency, a single note issue and a single
central bank had in three-quarters of a century largely replaced the
previously chaotic, trade-inhibiting structure, providing a springboard
for German industry and banking.
The rise of German joint-stock banking may be dated from the year
of European revolutions, 1848, when the difficulties of that year forced
the banking house of Schaaffenhausen in Cologne to be reconstituted,
with state help, as a public joint-stock company. The prompt help of the
Prussian state was provided not so much to rescue the owners but rather
to save its industrial customers in the Rhineland from the consequences
of the bank's failure. This provides a striking early example of the close
links between banking, industry and the state. The objective of
stimulating industrial development is seen even more clearly in the
formulation of the next joint-stock bank, the Bank fur Handel und
Industrie, established by a group of bankers, most of them directors of
the Schaaffenhausen bank, in 1853 in the somewhat unlikely base of
Darmstadt after the influence of the Rothschilds had ruled out the
preferred choices of Frankfurt or Berlin (the bank being commonly
thereafter also known as the Darmstadter Bank). Its original statutes
empowered it 'to bring about or participate in the promotion of new
companies . . . and to issue or take over the shares and debentures of
such companies ... to participate in the financial transactions and
investments of governments and to carry on all banking transactions'.
Its first annual report further described its aims as to 'facilitate the
export trade and the thousand other relations between German
industry and the money market' (Whale 1930, 12-14). The bank thus
foreshadowed two of the basic characteristics which later flourished
into creative fullness in the German banking system as a whole, namely
industrial banking as a special feature of universal banking. These
banks imitated but took to more effective lengths the basic principles of
the French Credit Mobilier by channelling the growing savings of their
regions so as to speed up the industrialization preferably of their own
regions, but failing that, of Germany as a whole.
A number of similar banks sprang up in the 1850s although many
were soon weeded out by the economic storms of 1857, which thus
provided a sharp early lesson of the risks associated with industrial
banking. Among the important survivors were two Berlin banks, both
formed in 1856, the Disconto-Gesellschaft, which had previously
operated narrowly as a credit co-operative, and the Berliner Handels-
Gesellschaft. A period of steady consolidation in the 1860s was
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
571
followed by a rapid surge of joint-stock company formation, including
banks, in the early 1870s, caused by three factors. First came a much
more liberal company law in June 1870, secondly came the euphoria
surrounding German unification in 1871, followed, thirdly by the war
bounty of the French reparation payments. A veritable banking mania
led to the formation of 107 joint-stock banks between 1870 and 1872.
Many of these failed to withstand the 1873 crisis, but among those
which did there were three which quickly grew to be among the largest
and most successful of German banks: the Commerz und Disconto
formed in Hamburg in March 1870, the Deutsche Bank formed in Berlin
at the same time, and the Dresdner Bank formed from a previously
private banking house in 1872. The two latter banks soon became
household names, being linked with the older Darmstadter and the
Disconto-Gesellschaft as the 'Big Four D-banks', although they never
quite attained the predominant position that the 'Big Five' (later four)
obtained in Britain. While the Dresdner Bank followed the traditional
Credit Mobilier route, the other two new banks followed the example
of the English banks in specializing in the finance of international trade
and in gathering deposits largely for that purpose, at least for the first
decade or so. For a time it seemed as if German banks, like the French,
were dividing themselves into either deposit banks or investment banks;
but that division was never clear-cut and did not last long, with all the
large banks from the 1880s emphasizing their close and continuing links
with German industry as an essential part of their many-sided financial
activities.
German banks usually not only retained sufficient shares of the
companies they promoted to justify representation on the supervisory
boards of such companies, but they also gained further representative
powers on behalf of company shares deposited in their banks by their
own customers. When German banks made — or make — loans to
industry they have the benefit of continuously up-to-date inside
information. P. Barrett Whale shows that as early as 1911 the six biggest
German banks together held a total of 825 supervisory directorships
widely spread among all the major sectors of manufacturing,
commercial, financial and transport business (1930, 50). More recently
Professor Born in his fascinating and comprehensive account of
international banking gives many pages of detailed reference to the
'close and lasting links forged between individual credit institutions and
certain major industrial and transport enterprises' (1983, 89).
Furthermore as George T. Edwards has pointed out in his fiery polemic
on The Role of Banks in Economic Development, holders of 25.1 per
cent or more of a company's shares have certain legal powers of veto - a
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ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
figure widely reached by the banks. Hence, adds Edwards, 'although
German industry only appears to be 10 per cent owned by the banks,
their actual power over companies is immense' (1987, 99).
The structure of German industry was influenced by the fact that
German bankers particularly disliked seeing cutthroat competition
among their customers, and so actively encouraged the process of
cartelization in industry before the First World War. In the same spirit
take-overs and mergers among the banks themselves led to each of the
Big Four D-Banks being 'surrounded by a group of provincial banks
working in harmony with it and more or less under its control' (Whale
1930, 29). The provincial banks however, as we shall see, were never
practically extinguished as they were in England and Wales. Before
switching the focus of our attention back to the currency, two other
related aspects require to be noted, namely the importance of savings
and co-operative banks, and the continued emphasis in policy and
practice placed upon the regional factor in financial and general
economic development in what has remained, whether imperial or
republican, a country with a meaningful federal constitution.
One of Europe's earliest savings banks was founded in Hamburg in
1778, giving rise to a handful of similar banks in north Germany by the
end of the eighteenth century. The return of peace in 1815 saw a
quickened pace, with 280 savings banks formed by 1836. Thereafter
the savings movement gathered an even stronger momentum, so that
by 1850 there were more than 1,200 such banks. By 1913 the savings
banks numbered 3,133, and had amassed assets totalling no less than
21 billion marks, or more than double the total assets of the nation's
commercial banks, which stood at 9.6 billion. The local savings banks
had by then become integrated in a series of regional Girozentralen,
the system culminating in the Deutsche Girozentralen or the Central
Bank for Savings Banks established in Berlin in 1918. Other important
working-class financial institutions included two main types of credit
co-operatives. The rural credit co-operatives set up by Friedrich
Wilhelm Raiffeisen (1818-1888) from around 1846 though at first
modest affairs soon mushroomed to reach 17,000 by 1914. The more
urban areas similarly saw a contemporaneous rise of industrial credit
co-operatives from around 1850 inspired by Herman Schultze-
Delitzsch. Almost every town of any size had one or more such
institutions, the total reaching 1,500 by 1913, with well over 800,000
individual members and with outstanding credits of over 1.5 billion
marks. By 1930 the total number of credit co-operatives of all kinds
came to around 21,500. Thereafter amalgamation strengthened the
local societies but drastically reduced their numbers - from 11,795 in
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
573
West Germany in 1957 to 3,042 in 1990, or to 3,380 in reunited
Germany as a whole (Deutsche Bundesbank, monthly report,
September 1991, Stat. 45).
As in England, the savings banks were originally intended to be
simply vehicles for the exercise of thrift by the poor, and certainly not
meant to encourage borrowing; but the competition of the credit co-
operatives eventually led the savings banks also to grant similar
facilities. Thus, quite unlike the situation in Britain where the POSB
(and the TSBs until comparatively recently) syphoned local savings
exclusively into government coffers and did not supply credit at all, the
German working-class financial institutions increasingly became
vehicles for the agricultural and industrial development of their regions,
to such an extent that even by 1930 'they had become universal banks in
the full sense of that term' (Born 1983, 248). Many of the larger
municipal and regional savings banks competed successfully with the
big nationwide universal banks to gain substantial stakes in industry,
and had thus liberated their activities to a far greater extent already by
the first quarter of the twentieth century than the various British savings
banks had dared to dream about even by the last decade of this century.
As the present writer emphasized (to the Wilson Committee), 'there is
considerable justification for the view that the inadequacy of bank
support (in Britain) for industry extends far back to the early days of the
twentieth century' (quoted in Edwards 1987, 31). In every locality in
Germany local, regional and nationwide banks compete to supply local
industrialists with their particular requirements. Another example of the
strength of the centrifugal pull of the regions in Germany is seen in the
case of the branches of the central bank. Whereas by 1914, within forty
years of its establishment, the Reichsbank had over a hundred main
branches and 4,000 sub-offices, the Bank of England did not open a
single branch during its first 132 years and has never had more than ten
(and mostly not more than eight) branches.
German history from 1850 to 1914 thus appears to afford a striking
example of the special role played by all the main sectors of the
banking industry in speeding up the growth of a previously backward
economy, and so, despite writings old and new to the contrary, seems
to give strong confirmation of Alexander Gerschenkron's thesis on
Economic Backwardness in Historical Perspective (1962). A recent
instance of the contrary view is given by Dr Feldenkirchen who points
to a number of cases where companies grew without help from their
banks, or in other cases where the banks deliberately ignored wealthy
customers. (Given millions of customers and thousands of banks, such
micro examples do little to dent the macro-economic generalization.)
574
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
Even Dr Feldenkirchen is forced to concede that instead of speaking of
a 'dependence of industrial enterprises on the banks' - which he tries to
dispute - we should speak 'rather of a mutual interdependence' (1991,
135). It was this special relationship between banks and industry that
helped Germany to achieve such spectacular growth in the half-century
up to 1914, by which time it had overtaken England to become 'the
most populated (68 million), richest and most powerful trading country
in Europe' and so well equipped financially, industrially and militarily
to embark confidently upon the disastrous voyage of the First World
War (Bohme 1978, 87).
German fiscal policy during the war relied, like that of France, more
on borrowing, particularly short-term, and less on taxation than was
the case in Britain. Consequently it was basically more inflationary.
With the breakdown of the international gold standard from 1914 it
was the differences in relative inflation that were seen to be the major
determinant of foreign exchange rates. The theory linking the internal
and external value of money was most fully developed at this time by
the Swedish economist, Gustav Cassell, in the form of his 'Purchasing
Power Parity Theory of Money and the Foreign Exchanges'. He argued
that 'Our valuation of a foreign currency in terms of our own mainly
depends ... on their relative purchasing power in their respective
countries', so that when the two countries have undergone inflation 'the
(new) rate will be equal to the old rate multiplied by the quotient of
their relative inflation.' This provides 'the new parity, the point of
balance towards which the exchange rates will always tend' (Cassell
1922, 138-40). Despite its many weaknesses, such as insufficient weight
given to capital movements including reparations, and the assumption
of relatively free markets, it shed a useful light at a time when
international trade had grown to play so large a role in Europe's
economies. Because the dollar was the least adversely affected currency
of the major economies the two most commonly used indicators of the
extent of the German inflation of 1914 to 1923 are the dollar rate and
the note issues of the Reichsbank.
The German inflation of 1913 to 1923, and especially the hyper-
inflation of 1922—3 have become for economists, historians and
politicians, the classic example of all time, appropriately generating a
plethora of books and papers. Fascinating and important as many of
these are, only a brief look at some of the essentials can be given here.
As table 10.1 shows, the external value of the mark fell by only a half in
the period from 1913 to 1918 - when trade was severely controlled -
despite the fact that note circulation had increased by 8.5 times.
However, with the return of freer markets after the war the exchange
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
575
Table 10.1 German inflation 1913 to 1923.*
Year end
Reichsbank note issue
Value of one US $ in marks
1913
1918
1921
1922
22188 m.
113640 m.
1280100 m.
2593 m.
4.2
8.0
184.0
7350.0
18 Nov. 1923
92844720.7 billion;
4.2 billion'
i:"A fuller table, on which the above is based, is given in Whale 1930, 210.
"'Billion' here means a million million.
rate changed from a lagged to a leading indicator as operators on the
foreign exchange began to expect tomorrow's mark to be worth less
than today's. The internal equivalent of such expectations led to the
velocity of circulation increasing so rapidly that there was
paradoxically a dire shortage of notes despite all the Reichsbank's
printing works being used flat out. From August 1923 prices soared
astronomically. With common necessities such as a loaf of bread or a
local postage stamp costing one hundred thousand million marks, daily
wage negotiations preceded work, wages were paid twice a day and
promptly and completely spent within the hour. Large sections of
society, including the middle classes, became impoverished; food riots
were common; there was a complete flight from money, which had
plainly become worthless to hold.
The explanation as to why the German authorities acted so as to
generate such an inflationary spiral is, in retrospect, readily discernible.
First was the fact that, initially, the economy as a whole seemed to
benefit, thus setting the country on the slippery slope. Then came the
realization that certain influential sectors benefited enormously to the
very end or nearly so. Such favoured groups included farmers and
industrialists with mortgages, all net debtors, including the provincial
states and the central government, helped by the hugely negative real
rates of interest. Borrowing was rewarded and reconstruction received a
strong boost. Registered unemployment in Germany in October 1922
was only 1.4 per cent, compared with 14 per cent in Britain and over 15
per cent in 'neutral' Sweden (Born 1983, 219). France was convinced
that the inflation was a trick to escape the burdens of reparations and so
sent its army, with that of the Belgians, into the Ruhr in January 1923. A
general strike ensued, leading to a drastic fall not only in coal
production but also in coal exports in which reparations were partly
576
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
paid. In retaliation the French blocked fiscal payments from the
occupied territories to the Reich government, substantially increasing
the budgetary deficit, which in turn was met by merrily printing still
more money. Inflation seemed to provide an easy way out of the
difficulties facing the weak Weimar Republic.
Nevertheless as 1923 wore on, the beguiling short-term advantages of
inflation became submerged by the harsh realities of social and
economic chaos, the return of barter and the dangers of civil war. On 15
November 1923 the old currency was replaced by a new, temporary,
currency, the Rentenmark. This transitional currency was secured on
mortgages on land and industrial property, and more importantly was
limited to a total issue of 3.2 milliard marks. The necessary discipline
was reinforced when Dr Hjalmar Schacht became president of the
Reichsbank in December 1923. In the next few months the Dawes Plan
was drawn up to provide a solution to the reparations problem and to
lead Germany back to the gold standard. As from 1 September 1924
Germany returned to the gold standard though, as was to become
customary, without internal gold coin circulation. The new currency,
the Reichsmark, equivalent to the pre-war gold mark, had to carry a
reserve of 40 per cent, of which at least three-quarters was to be in gold.
Furthermore the London Agreement (which ratified the Dawes Plan)
insisted upon the independence of the Reichsbank, and strictly limited
the maximum loans which the bank could make to the government.
Germany's monetary ills appeared for a while to have been cured, but
renewed financial difficulties in the early 1930s paved the way for the
rise of Hitler and the loss once more by the Reichsbank of its hard-won
but short-lived independence. It is worth repeating here that the price of
monetary — and therefore of other — liberties is eternal vigilance.
The recurring financial crisis of 1929-33 had two underlying
elements; the vast size and volatility of international liquid, short-term
assets on the one hand and the marked decline in the value of medium-
and long-term loans and shares in the portfolios of banks on the other.
British banks were worried chiefly by the former, for it was that
volatility that led to sterling's departure from gold in September 1931:
the banks in Britain had remained solid and secure. German and
Austrian banks suffered from both features, including not only the
withdrawal by American and other foreign investors of liquid deposits,
'hot money' in flight for political as well as economic reasons, but also
were extremely vulnerable to the sharp decline in the value of their
medium- and long-term loans to and shares in shaky industrial
customers. The first to collapse was the Creditanstalt, Austria's largest
bank, which closed its doors on 11 May 1931. The panic spread quickly
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
577
to involve the big German banks, the most vulnerable of which, the
Darmstadter and National Bank (the 'Danat'), closed on 13 July 1931.
The Austrian bank was reopened only after an international rescue
operation had been arranged by Montagu Norman. To forestall a run
on the other German banks an extended Bank Holiday was announced,
lasting for a fortnight, with the German banks eventually opening again
on 5 August. In the mean time an international financial conference was
held in London from 21 to 23 July, at which US President Hoover
proposed a one-year moratorium on international political debts,
including German reparations. Despite strong French reluctance (since
they rightly, if prematurely, feared a German— Austrian Anschluss'), this
was accepted, providing a basis for the almost-final settlement of
reparations and inter- Allied war debts and giving time for the German
authorities to prepare plans for strengthening their perilous banking
system.
As part of this process the Danat was merged with the Dresdner
Bank, with the state taking up about 90 per cent of the shares. Similar
capital restructuring saw 70 per cent of the shares of the Commerzbank
and over 33 per cent of the capital of the Deutsche Bank being owned -
temporarily - by the state, although these share holdings were
reprivatized by 1936. A more permanent reform was provided by the
Banking Act of 1934. This set up, for the first time a national Banking
Supervisory Board, authorized to license every bank and to receive
monthly reports from all the banks in which details of all loans of RM 1
million or more had to be provided. As a result of the crisis the banks
reined back on their previously aggressive lending policies, the new
restrictions helping to push German unemployment to over five million
by mid-1932. After the social turmoil of the next six months Hitler was
installed as Chancellor in January 1933. From then onwards the
financial system and the economy in general were geared to
rearmament. Reichsbank President Schacht introduced rigid exchange
controls with an effective range of multiple exchange rates which not
only helped limit balance of payment deficits but also assisted the drive
for 'autarky' or self-sufficiency by reducing reliance on key imports.
The early victories gained by Germany in the war of 1939-45
generously supplied her with greatly enlarged resources to add to those
coming from a much improved fiscal regime, compared with that of
1914-18, including high-yielding income and other taxes. Thus whereas
only 13 per cent of government expenditure in the First World War
came from taxation, in the Second this percentage rose to 48. Such
measures, together with a compulsory price freeze, enabled the German
authorities very effectively to suppress inflation until near the war's end
578
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
in May 1945. By then, with devastation all around, the economy as a
whole as well as its monetary sector virtually ceased to function. In the
official markets ration cards and permits were far more important than
currency, while in the black market, as any old soldier in the invading
armies will recall, cigarettes, soap, bully beef and chocolate became
preferred items of currency. The Allied occupation powers initially
enforced their divide-and-rule policies with regard to German
industrial and financial combines. This 'decartelization policy' was
applied both to the big commercial banks and to the central banking
system. The Deutsche, the Dresdner and Commerz banks were each
split up into legally separate entities in each of the German provinces,
while no bank was allowed to own branches outside its own province,
thus reflecting American banking theories and practices. This divisive
policy began to be reversed in the three western zones as Allied co-
operation with Russia changed into the Cold War, with West Germany
joining the European Recovery Programme by October 1949 and so
benefiting from the precious dollars of the Marshall Plan. As for the
legally separated big banks, each of their divisions in practice began
acting increasingly in a co-ordinated fashion, Gradually the law caught
up with practice. In 1952 the Law on the Regional Scope of Credit
Institutions divided the Federal Republic into three banking zones,
within each of which branching was allowed to spread until finally in
December 1956 the Act to Terminate the Restriction on the Regional
Scope of Credit Institutions again allowed nationwide freedom, so far
as West Germany was concerned, with East Germany included after
July 1990.
With regard to central banking, the modifications significantly
retained and in some ways reinforced the regional element because this
conformed both to American and German federal tendencies. The
former Reichsbank was at first in 1948 replaced by a legally
autonomous 'Landesbank' in each province, with the necessary degree
of co-ordination being supplied by the Bank Deutscher Lander in
Frankfurt. This system was easily modified by the Banking Act 1957
setting up the Deutsche Bundesbank with its head office still in
Frankfurt and with its eleven Lander central banks each with its own
branch system, the largest, North-Rhine- Westphalia, having as many as
fifty branches.
Having twice suffered the worst evils of inflation within a single
generation the German people were fully behind the government in
conceding such a high degree of autonomy to the Bundesbank as to
make it the most independent central bank in the world, considerably
more so than the US Fed that had been its original model. Its
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
579
constitution granted its president a normally secure eight-year period of
office and specifically stated that the bank was to be 'independent of
instructions of the federal government' although being 'bound in so far
as is consistent with its functions, to support the general economic
policy of the federal government'. Its one simple, clear objective is given
in the Bundesbank Act as 'regulating the amount of money in
circulation and of credit supplied to the economy, using the powers
conferred on it by this Act with the aim of safeguarding the currency'.
There was no misconstrued Keynesian nonsense here - as was shown in
the almost contemporary Radcliffe Report in Britain - regarding the
unimportance of the money supply or of the exaggerated difficulties in
measuring, let alone controlling, it, nor of the acquiescence in rubber-
stamping the inflationary demands of government. On the contrary, it
has been the success of the Bank Deutscher Lander and of the
Bundesbank in safeguarding the currency during the second half of the
twentieth century, when so many other central banks have dismally
failed in that duty, that made the German central bank a model for
international imitation, and especially in formulating current plans of a
European central bank - at least until the European slump of 1990-3.
The German central banking system could not have achieved such an
enviable record had it not been provided right from the start with a
reformed currency in a free market economy. The currency reform of
1948 has been adjudged by Professor Kindleberger as 'one of the great
feats of social engineering of all time' (1984, 418). On Sunday 20 June
1948 the Reichsmark was replaced by the Deutsche Mark at a ratio of
10:1, except for an initial personal allowance of DM 40 at a rate of one-
for-one. Simultaneously the economics minister, Ludwig Erhard,
announced the ending of most of the previous restrictions, such as the
freeze on prices and wages and most of the rationing system. The
resultant economic miracle was 'the miracle of a free market' (Friedman
and Friedman 1980, 79). The ability to exchange goods into worthwhile
money that retained its value proved to be an enormous incentive,
bringing goods out of hiding into the open market and providing the
savings for a prolonged investment drive, not into welfare services,
which would then have seemed unjustifiable extravagance, but into
more directly productive manufacturing industry and basic infra-
structure. The West German currency and economic reforms of 1948
thus provide a pertinent and topical lesson for the former communist,
command economies of eastern Europe and Russia.
It is interesting to see that when, as a special part of this process, the
Federal Republic and the German Democratic Republic decided on
economic, social and monetary union by the Treaty of 1 July 1990, it
580
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
was the view of Chancellor Helmut Kohl that prevailed against that of
the Bundesbank's President Otto Pohl, who had previously publicly
decried as 'fantastic' the very idea of one-for-one exchange rate between
the West and East German marks. Although a general (and still
generous) rate of DM l:OM 2 was applied to all business and to large
personal holdings, a personal preferential rate was conceded at one-for-
one to a maximum limit of 2,000 marks for children below fourteen
years; a maximum of 4,000 for persons from fourteen to fifty-nine and a
maximum of 6,000 for older persons. Thus, says Professor Ellen
Kennedy, in her illuminating study, The Bundesbank, 'the Bank lost on
the issue of a currency union between two very different economies'
(1991, 109). Chancellor Kohl's gamble (giving the small person, i.e.
most of the voters, a bonus) appeared initially to have worked well, for
claimed the Bundesbank, with premature optimism, 'since the
monetary union the West German economy has grown much more
strongly than before . . . and in 1990 experienced its eighth successive
year of economic upswing' (Deutsche Bundesbank Monthly Report,
October 1991, 14). The state bank system of East Germany was
modified to fit the western system while the Bundesbank formally
assumed responsibility for domestic and external monetary policy over
the whole of the reunited country.
In concluding this outline of German monetary and banking
development it is necessary to point out that despite considerable
apparent concentration in banking since 1957, Germany remains a
country where the big three commercial banks, the Deutsche, Dresdner
and Commerz, ranked eleventh, twenty-fifth and thirty-sixth in the
world, ( The Banker, July 1991) were still faced with strong competition
from over 4,000 other banking institutions, a large number of which
offer universal banking just like the big banks and with 335 being
classed as 'commercial banks'. In addition, as in most continental
countries, Germany's Postbank provides a widely used payments
system, with 4.8 million giro accounts in 1990. Thus the structural
complexity of the German banking system allows local, regional and
nationwide banks to overlap and enjoy a lively competitive co-existence.
Such competition has been particularly effective in stimulating
Germany's consistently high personal savings ratio, which, according to
the Bundesbank, was a significant factor in raising West Germany's per
capita income to one-third above the EC average (Monthly Report,
October 1993). The structural picture is summarized in table 10.2,
showing a marked decline in bank numbers together with a
corresponding strong increase in branches. Much of the concentration
took place between 1957 and 1977, during which the number of banks
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN 581
Table 10.2 Number of banks and branches in Germany 1957-1990. i:"
Year
No. of banks
No. of branches
Total offices
^333
1967
10859
26285
37144
1977
5997
37764
43761
1987
4543
39913
44456
1990a
4170
39807
43977
1990bt
4711
43559
48270
1991
4451
44862
49313
1992
4191
48645
52836
s"By September 1999 the total number of banks had fallen to 3,034, including
the 4 Big Banks, 289 Commercial Banks, 200 Regional Banks, 570 Savings
Banks and 2,070 Credit Co-operatives. Deutsche Bundesbank Monthly
Report, November 1999.
f Figures from 1990b onwards include East Germany, all previous figures
being for West Germany only.
Source. Bundesbank Monthly Report, August 1993, table 23.
fell to less than half their former number whereas total branch numbers
practically trebled. Thereafter the number of banks fell only very
gradually until the early 1990s so that, making allowance for
reunification, there had been a remarkable stability in the number of
branches and in total offices. The decline in bank numbers accelerated
in the mid and late 1990s, down to 2,531 in October 2001, a fall of 46%
since 1990 (Monthly Report, Deutsche Bundesbank, December 2001,
Statistical Section, p. 24).
It was however to Germany's central banking system, working within
an economy with rising productivity supplied by industry-wide unions,
that the inflation-weary eyes of the rest of the world turned with much
admiration and yearning, as providing an anchor for Europe's Exchange
Rate Mechanism and a model for a European central bank which in due
course was confidently expected to become the centre of gravity of a
European System of (Independent) Central Banks. The real cost of
reunion to West Germany and, indirectly to the rest of the EC, was soon
seen to be much heavier than originally anticipated, in that it helped to
increase inflationary pressures in Germany just when unemployment was
rising there and elsewhere. There were already nearly eighteen million
unemployed in the Community by 1992, and it was feared that this would
rise to twenty million if interest rates were not quickly and substantially
reduced. Such high rates of unemployment were incompatible with the
high rates of interest needed to keep EC currencies on track towards a
582
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
single currency anchored to the Deutsche Mark. Hence came the
monetary crises of 1992-3 which led to the virtual disruption of the
Exchange Rate Mechanism. The history of the 1930s was being repeated
in the 1990s. Other countries should not however blame the Bundesbank
for the results of their own previous monetary mismanagement. From
being a long-run ideal, the Bundesbank was turned into a temporary
scapegoat with Dr Helmut Schlesinger, like Montagu Norman sixty-
seven years earlier, taking the role of unemployment-raising, sound-
money villain. Nevertheless, the European Union's long-run commitment
to financial rectitude was reaffirmed in October 1993 by the decision to
site the European Monetary Institute, and hence eventually the European
Central Bank, in Frankfurt, thus giving greater credibility to the
expectation that the euro would graft itself on to the well-rooted
reputation of the Deutsche Mark.1
The monetary development of Japan since 1868
Introduction: the significance of banks in Japanese development
No major country in the world has managed to achieve such a
remarkably sustained record of economic growth as that attained until
the 1990s by Japan, in comparison with which even the German post-
1950 economic miracle falls very much into second place. It is no
coincidence that in no other country has support for industry from the
banks, together with the active encouragement of government, been so
strong and continuous. Long-term perspectives tend to predominate over
short-term expediency both in industry and in banking. Japanese banks
have long discovered that the best way of helping themselves has been to
aid industrial growth through medium- and long-term lending as well as
by short-term, operational loans. While the Japanese economy has
overtaken the rest of the world to come second only to the USA, her
banks have grown without any doubt into the world's largest. In 1990 no
US bank appeared in the world's top twenty, whereas Japan had no less
than nine banks in the top twenty, and as many as six in the top ten ( The
Banker, July 1991). The four biggest banks in the world, all Japanese,
together owned assets in 1990 totalling $1,634,548 million, a total not
reached even by the sum of the assets of America's thirty biggest banks.
Furthermore it is not as if the Japanese banking system is so highly
concentrated that the giants have inhibited the growth of other large
and medium-sized competitive banks. On the contrary, so vigorous has
been the growth of large and medium-sized banks that altogether Japan
has 109 banks listed in the world's top thousand. British banks, despite
1 For later developments in the euro see Chapter 13.
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
583
their greater concentration, have only thirty-five in the top thousand,
while the assets of these thirty-five together come to only 70 per cent of
the total held by the four biggest Japanese banks. Neither is it the case
that Japanese banks have grown only because of their naturally
privileged position inside the successful Japanese economy - though
that has been the foundation factor and remains the major reason for
their apparent strength. Nevertheless when tested outside their home
base, for example in the highly competitive 'neutral' market of London,
Japanese banks (as detailed in chapter 8) came to hold by far the largest
share of assets among foreign banks, the Japanese total being £252,754
million in June 1990, around twice the total held then by American
banks, at £128,507 million (BEQB August 1991).
It is abundantly clear from the Japanese example that the close
involvement of banks in industry, if properly developed, does not, as
feared in Britain, inhibit or endanger the growth of the banking industry
- a fear once more strongly but falsely paraded during the 1990-2
recession. (It was not lending long to British industry but rather to
property companies and Third World countries that led to the large
banking losses in Britain and America, even though domestic industries
were punished by heavier costs and restricted lending as if they were the
guilty parties.) Japanese history provided the world's most powerful
demonstration of the mutual benefits that the banks as well as their
industrial customers gain from their close interrelationship, and at the
same time exposed the myth, nurtured for a century by conventional
British bankers and complacent governments, that only through their
cold and cautious avoidance of long-term commitments to industry
could British banks avoid failure. It is this glaring contrast in banking
philosophy that gives the Japanese experience of banking development its
special significance. This development may now be conveniently traced in
four periods from the Meiji restoration in 1868 up to the end of the First
World War, then from 1918 to 1948; thirdly the subsequent period to
1990, encompassing the world's greatest economic miracle, and finally
the long recession from 1990 to 2002.
Westernization and adaptation, 1868-1918
Modern banking in Japan first started with the Meiji restoration of
1868, which ended the barren isolationist policy previously pursued and
which began deliberately fostering the modernization of its economy
through first imitating and then adapting western models to its own
particular requirements. Perceptive adaptation was equally, if not more
important than eager imitation in explaining the speed with which
Japan caught up with the West. Although a few pre-Meiji rudimentary
584
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
banking organizations had been developed by the Zaibatsu baronial
family groups to provide financial services for their trading enterprises,
mostly in the form of exchange offices, these were completely
inadequate to meet the needs of liberalized trade after 1868. The pre-
Meiji regime had left the monetary system in such a state of chaos that
a reformed currency was urgently needed, together with a completely
novel banknote circulation, which in turn required the rapid
establishment of banks of issue. The 1871 Currency Act established the
national Mint at Osaka, introduced the decimal system of yen and sen,
and indicated the government's intention to change from its traditional
silver standard to the increasingly fashionable gold standard, although
it was not until the successful conclusion of the Sino-Japanese war of
1894-5 had provided Japan with sufficient gold reserves that eventually
in 1897 the gold standard was officially adopted.
Meanwhile the Japanese authorities had turned to America to provide
the model for its commercial banks, and to Belgium for the constitution
of its central bank. Leading the way as the first bank to be established
under the American-like rules of the National Bank Act of 1872 was the
Dai-Ichi Bank set up in 1873 by the government with the support of some
of the larger Zaibatsu banks. However the regulations of that Act were
soon seen to be inappropriate to Japanese conditions, and only three
other banks were formed until the Act was modified in 1876. Thereafter
there was a surge in bank formation, with the numbers increasing rapidly
to reach 153 by 1879. A further pointer to Japanese adaptability was the
tacit permission to allow unofficial quasi-banks to operate alongside the
official banks in carrying out financial operations, including note issue.
However, the plethora of local note issues was confusing and unreliable,
thus adding to the pressures leading to the setting up of a central bank
with a centralized, and eventually single and uniform, note issue.
The Bank of Japan was established in 1882 following an investigative
visit by the minister of finance to Europe in the previous year. He took
as his model the National Bank of Belgium for, after all, the Americans
had no central bank and the Bank of England no written constitution.
The National Bank of Belgium, a country which had closely followed
Britain in industrialization, possessed a written constitution and had
been formed in the relatively recent past, in 1850. As the Japanese Prime
Minister later explained: After careful study and comparison of the
central banking system of Europe we found the Bank of Belgium was
peerless . . . consequently it was decided to adopt the Belgian system'
(Goodhart 1985, 144). Gradually the Bank of Japan expanded its own
note issues to replace those of other banks, a process completed by
1899, when all other notes ceased to be legal tender and Bank of Japan
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
585
notes were fully convertible into gold. The goal of an efficient currency
system had thus been finally achieved by the end of the century, by
which time the Bank of Japan had become not only 'the central feature
in the consolidation of the monetary, banking and credit systems' but
also 'the cornerstone of the modernisation of the Japanese economy
and of the development of modern industries' (Pressnell 1973, 10). Two
of the main methods by which the Bank of Japan had achieved these
results were by its consistent downward pressure on interest rates for
privileged purposes and its encouragement of special banks set up to
provide long-term loans to industry.
By 1901 the number of banks had reached its peak of 1,867.
Thereafter amalgamation and merger reduced the numbers, especially
of the weaker banks, and so increased the average size and strength of
the banks. Among the most powerful of such banks were those
established by the Zaibatsu. Thus the Mitsui family managed to
upgrade their exchange bureau into the Mitsui Bank in 1876, followed
by the Mitsubishi Bank and the Yasuda Bank, both formed in Tokyo in
1880. In 1895 the Sumitomo Bank was established in Osaka. Having
been built on widespread family trading empires that in some cases
stretched back for centuries, the Zaibatsu banks were from the
beginning much larger and stronger than most of the other banks and
grew to absorb many of these; e.g. the Yasuda Bank had absorbed
seventeen other banks by 1912. The Zaibatsu banks have concentrated
mainly but not exclusively on accommodating the needs of their own
industrial, commercial and financial combines particularly in granting
long-term finance, a selective and preferential policy justified to the
extent that the lending bank has a very close knowledge of the assisted
firm and they both have a long-lasting mutual commitment to each
other. Short-term operational finance was more widely and readily
supplied even to companies outside their empire. Thus in their long-
term lending they mirrored the German banks, while in their
deposit-gathering and short-term business lending they imitated
traditional English banking. In this way the Zaibatsu banks paved the
way for the general adoption of 'universal'-type banking by the
Japanese commercial banks.
Other important types of banks also emerged in the Meiji period
(1868-1912). These include the savings banks, whose number had risen
to 441 by 1901, having increased twentyfold from a mere score of such
banks ten years earlier. Wherever the government perceived special needs
or gaps in the financial system it stepped in to meet the need or fill the
gap itself or prodded others to, rather than adopting a laissez-faire
attitude and allowing the market to do so in its leisurely way, if ever. In
586
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
particular the government helped to establish special banks to assist the
growth of the export trade and to supply long-term loans to large and
small industrial companies. The earliest of such special banks was the
Yokohama Specie Bank, privately founded in 1880 but with a third of its
capital supplied by the government, which took a guiding interest in its
activities. Its first task was to replace the control exerted by foreign
banks and merchants over the financing of Japanese overseas trade. It
co-operated closely with the Bank of Japan in financing exports and in
channelling the proceeds into the reserves of the Bank of Japan, the
Japanese exporters gaining through being given immediate credit or
fully convertible notes rather than having to wait until the foreigner's
bank paid up or discounted, at a not particularly favourable rate, their
bills of exchange. In favourable contrast, the Bank of Japan provided
finance to discount trade bills at the cheap rate of 2 per cent, most of it
via the Yokohama Specie Bank. This latter bank was granted a virtual
monopoly in the financing of Japanese trade, and for this purpose found
it convenient to establish at an early date branches in places like London,
San Francisco and New York.
The Hypothec banking law of 1896 provided umbrella legislation
under which a number of different kinds of specially favoured industrial
and agricultural banks were set up. First came the Hypothec Bank of
Japan, established in 1897 to provide the larger farmers and
entrepreneurs with long-term loans. Under the same law the government
gave subsidies for the establishment in each of Japan's forty-six
prefectures of banks to supply similar long-term loans, but tailored to
the small-scale requirements of the local communities concerned. Still
more regionally orientated finance was provided by the Hokkaido
Colonial Bank, set up in 1899 for strengthening the economy of this
remote northern province. In addition, the Industrial Bank of Japan was
established in 1900 to provide long-term loans and debentures to assist
the development in particular of the mining and metallurgical industries.
In 1906 Japan became, with Switzerland, the first country to follow
Austria's lead in developing the postal giro system. According to
Britain's Fabian Society the Japanese postal service was by 1916 'more
up to date than our own country' (Davies 1973, 79).
Certainly in terms of military power (perhaps the main motive
behind the drive to industrialize) Japan was already catching up with
the West, as was clearly demonstrated by her victory in the war with
Russia in 1904-5. The First World War greatly stimulated Japanese
industry, shipping and shipbuilding, so that by 1918 another milestone
in her economic progress had been passed, as she turned from being a
debtor into a creditor country.
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
587
Depression, recovery and disaster, 1918—1948
In contrast to the previous period when economic trends pointed
strongly upwards and the banks, despite occasional and relatively
minor failures, generally prospered and expanded at a rapid rate, the
thirty years from 1918 unfortunately contained only a few bright spots
separated by long intervals of gloom, failure and difficulty, culminating
in the disastrous results of the Second World War. By 1920 the boom
generated by the First World War had petered out, ushering in a chronic
depression. The economy had by no means recovered when on 1
September 1923 Tokyo with its port of Yokohama, the country's
economic and financial centre, was hit by an earthquake which killed
around 140,000 people and devastated large areas of the city (see The
Economist, 7 December 1991). 2 The government imposed a one-month
moratorium, while the Bank of Japan co-ordinated the activities of all
the main banks to finance the massive programme of reconstruction
that was urgently required. The country had barely recovered from this
natural disaster when in March 1927 another financial crisis began with
a run on the Bank of Taiwan (Taiwan had been a colony of Japan since
1895). A number of that Bank's important customers, including the
large Suzuki conglomerate, then under suspicion, had also been granted
long-term loans by other banks in Tokyo and Osaka. Consequently the
banking panic in Taiwan quickly spread to the banks in these two
centres, forcing the closure of a number of banks there. Eventually as
many as thirty-seven banks were closed, at least temporarily. To meet
the immediate difficulties, the government resorted to its usual device
of a moratorium, which lasted for three weeks during which the Bank of
Japan organized a programme of assistance. The depth of the crisis had
however made it quite clear that fundamental changes were required to
re-establish a sound banking system. The 1920s had exposed the
vulnerable side of an industrial banking system - although it must be
stressed that the Zaibatsu banks remained strong and, as we shall see,
became even stronger through picking up the pieces after the debacle. It
was not industrial banking as such that was to blame but rather the
dangers of lending too much too long to weak businesses by banks with
insufficient capital and poor management.
To meet these dangers the Bank Act of 1927 was passed, stipulating,
first, that the designation 'bank' was to be more strictly defined, thus
diverting business away from some of the quasi-banks to institutions
where their business was likely to be more carefully examined before
loans were granted. Secondly, the designated banks were to be
prohibited from engaging in non-banking activities: in other words they
had to concentrate on being simply banks. Thirdly, a stronger system of
2 Contrast the effects of the Kobe earthquake of 17 January 1995 - see p. 681.
588
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
bank supervision was laid down. Fourthly, limitations were placed on
the freedom to open branches. Fifthly, and possibly most important of
all, minimum capital requirements were substantially raised, increasing
with the size of the town in which the bank's head office was situated.
This latter measure alone disqualified more than half the number of
banks then in existence. The already marked trend towards
amalgamation was thus greatly speeded up, with the number of banks
falling from 1,400 in 1926 to 683 by 1932 and to 418 by 1937. In contrast
the Zaibatsu banks, as indicated, greatly increased their relative
importance, with the five biggest banks increasing their share of total
deposits from 24 per cent in 1926 to 37 per cent in 1930 (Pressnell 1973,
26). Amalgamation similarly led to a dramatic reduction in the number
of savings banks from 636 in 1921 to 124 in 1926, and down to just
seventy-two in 1936. By then military adventures were beginning to
dictate economic policy and financial priorities. Having become a great
international trading nation Japan was at first deeply affected by the
Wall Street crash and the subsequent world slump; but with a
remarkable resilience, largely overlooked by western economists, Japan
rapidly recovered from this greatest of all world depressions.
It managed to cling on to the gold standard for some months after
sterling left gold in September 1931, until, following an alarming loss of
reserves, the yen too went off gold on 17 December 1931. In Japan's case
there was an additional reason in that her military actions along
Manchuria's border with China on 18 September 1931 had frightened
foreign creditors into accelerating their withdrawals of gold from
Japan. Thereafter, inspired by the finance minister, Korekiyo
Takahashi, Japan embarked on an external policy of manipulated
exchange rates and an internal policy of controlled inflation, a striking
combination of Schachtian and Keynesian economics that was
particularly effective. Reflation and competitive devaluation stimulated
production and exports (leading to loud complaints of 'dumping' from
the USA and Britain) and enabled Japan to devote increasing resources
to rearmament in the years leading to its entry into the Second World
War on 7 December 1941. It was by means of 'Takahashi finance',
wrote Professor Takafusa Nakamura that 'Japan climbed out of the
depression even as other countries remained mired in it, enjoying an
expansion that calls to mind the high-growth period of the post-war
years' - as is shown in figure 10.1 (1989, 6).
Only three aspects of war finance need to be noted: first, the
complete priority by which the banks financed the borrowing
requirements of the munitions industries; secondly, the support which
all the banks gave to government bond issues; and thirdly, the impetus
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
589
6—
4
2-
4.4
1931
-40
Average annual percentage by decade
10.7
9.2
-2.5
4.6
4.3
1941
-50
1951
-60
1961
-70
1971
-80
1981
-90
0.3*
1991
-2000
*The stagnation, 1991-2000, stands out as a disconcerting contrast to Japan's previous 40 years of
high growth, see pp. 594—5.
Source: Takafusa Nakamura, Economic Eye, Tokyo Summer 1989 and
1990.
Figure 10.1 Real economic growth rates in Japan, 1931-2000.
towards amalgamation. Between 1936 and 1945 total lending by the
commercial banks increased eightfold, but the number of banks fell
from 418 to 61. The fall in the number of savings banks was even more
dramatic, from sixty-nine in 1940 to only four in 1945. Many of these
savings banks were absorbed by the big commercial banks for, in order
to provide further assistance to war financing, the regulations were
modified to allow the commercial banks to open savings accounts.
Amalgamation among some of the big banks also took place, such as
that between the Mitsui and the Dai-Ichi banks. In such ways, with the
financial, administrative and industrial powers of the Zaibatsu being
still further strengthened during the war, they were seen as the
economic heart of the military machine.
Not surprisingly, therefore, as soon as the war ended, one of the first
economic policy decisions of the American occupying forces was to
pass anti-monopoly and de-centralization laws in an effort to break up
the Zaibatsu and to separate their banking activities from their
industrial bases. In a series of directives between September 1945 and
the middle of 1948 the Allied authorities closed down a number of the
590
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
Japanese special banks such as the Yokohama Specie Bank and the
Bank of Taiwan (although the former was later reopened as a
commercial bank called the Bank of Tokyo). As in American practice,
the authorities insisted on the separation between 'commercial' and
'investment' banking and tried to reduce inter-group shareholdings. It
seemed as if the traditional close links between the big Japanese banks
and their basic industries, a link that had enabled Japan to rise so
rapidly into a first-class economic - and military - power, were to be
permanently severed. However, within the space of just a few years the
picture again changed dramatically.
Resurgence and financial supremacy, 1948—1990
It was fear of the spread of communism and the growing international
tensions leading to the outbreak of the Korean War in June 1950 that
brought about a rapid reversal of American policy in Japan. The former
policy of insisting on harsh reparations, breaking up viable large
enterprises, rigid rationing, huge budgetary deficits, multiple exchange
rates and so on, was replaced by American aid for reconstruction and a
drive towards free markets as the economic counterpart of
democratization. The initiator of this new approach was Joseph Dodge,
a Detroit banker. Under his guidance the 1949 budget was balanced,
rationing abolished, runaway inflation was brought under control and a
single rate of exchange established, at 360 yen to the US dollar, which
was to last unchanged for twenty-two years. From mid-1950 Japan
benefited very considerably from being the main Asiatic base for the
supplies needed for the Korean War, its services in this way bringing in a
bounty averaging $800 million each year between 1951 and 1953, all the
more welcome for coming at a time of world dollar shortage. These
precious dollars reinforced the Dodge free-market policy, together
playing a crucial role in setting Japan's reindustrialization in motion.
Special banks were again set up wherever any gaps were perceived,
e.g. to assist in financing exports and to grant long-term loans for
industrial and regional development. Among these were the Export
Bank founded in 1950 (and becoming the Export-Import Bank in 1952);
the Japan Development Bank (1951) and the Small Business Finance
Corporation (1953). Local co-operation and savings banks were
permitted to resume with greater freedom than before. The Zaibatsu
re-emerged, all the more quickly because, unlike the situation in
Germany where the Big Three Banks as well as the cartels were broken
up, in Japan by contrast the Zaibatsu banks had been kept intact and
simply cut off from the rest of the group business. The leaders of the
Mitsui, Mitsubishi and Sumitomo Zaibatsu had continued their habit
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
591
of regular weekly meetings, so that as soon as the Peace Treaty of 1952
returned governmental authority to the Japanese, the American-type
anti-trust laws were repealed and the Zaibatsu, complete with their
core banks, were rapidly reconstituted. Moreover a number of other
industrial groupings sprang up, each with their own favoured and
partly owned bank at its centre. These are the 'Keiretsu' of horizontally
and/or vertically integrated groups, whose councils, consisting mainly
of the group's directors and chief executives — an effective blend of
seniority and meritocracy - hold regular meetings. These afford
opportunities to discuss matters such as key staff appointments and the
broad outlines of the group's long-term policies in a leisurely and
confidential manner. By common consent the monetary, industrial and
trade policies of the Bank of Japan, the Ministry of Finance and of
MITI (the Ministry of International Trade and Industry) are digested,
co-ordinated and more effectively applied because of the existence of
such 'Keiretsu' and the spirit of consensus which they engender. The
central role of the banks is obvious in this group network.
The most internationally visible sign of the recovery of Japan's basic
industries was seen when in 1956 it had achieved first place in world
shipbuilding. Thereafter, through meticulous long-term planning based
on the near-certainty of sufficient supplies of long-term finance at
relatively low rates of interest, a number of other specific industrial
sectors were targeted, including motor-cycles, cars, electronic equip-
ment and heavy earth-moving vehicles. As well as long-term bank
loans, much of the equity finance was provided by the industrial groups
related to the target industry with a commitment to its success, proving
to be stable rather than volatile investors, accustomed to taking a long-
term perspective. These are just a few examples of the industrial sectors
contributing to the export-led growth of the Japanese economy. In every
case, though far from being the only factor, the financial aspects were
of central importance to the success of the Japanese economic miracle,
one of the most substantial and sustained examples of economic resurg-
ence in world history, the remarkable extent of which is illustrated over
the long term in figure 10.1 and, in its still impressive performance, in
table 10.3: such a contrast to the subsequent stagnation.
In the 1950s a young Keynesian economist, Osamu Shimomura,
persuaded the authorities to endorse a startlingly ambitious plan
intended to double the average income in a decade, i.e. requiring a
growth rate of 7.2 per cent each year. In fact the actual average annual
growth rate in the 1950s came to 9.2 per cent, and in the 1960s to an
astonishing 10.7 per cent. These are not freak results obtained as an
aberration in the odd year but substantial averages of around 10 per
592 ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
Table 10.3 Selected economic and financial indicators, Japan 1983-1989.
Year
1983
1984
1985
1986
1987
1988
1989
Real GNP
growth %
3.2
5.1
4.9
2.5
4.5
5.7
4.9
Retail prices
increases %
1.9
2.3
2.0
0.6
0.1
0.7
2.3
Unemployment %
2.6
2.7
2.6
2.8
2.8
2.5
2.3
Money supply
M2 & CDs %
7.4
7.8
8.4
8.7
10.4
11.2
9.9
Balance of
payments surplus,
current a/c,
US $ million
20799
35003
49169
85845
87015
79631
57157
Gold & foreign
exchange reserves.
US $ million
23262
24498
26510
42239
81479
87662
84895
Yen per US $
average annual
rate*
237.53
238.58
238.54
168.51
144.62
128.15
137.96
* The rate of 360 was fixed in 1949 and lasted unchanged until August 1971.
Source: Economic Eye (winter 1989 and summer 1990).
cent for the two decades between 1950 and 1970. To a country as
heavily dependent on imported fuel as Japan, the oil shock of 1973
initially had a tremendous impact, helping to push up retail prices by 23
per cent in 1974. However, the necessary adjustments were quickly
made, and although the growth of the earlier 'miracle' years has never
been regained, the subsequent average of around 4.5 per cent for the
years from 1970 to 1990, built upon a higher base, is still significantly
higher than that of other major economies.
By the mid-1970s Japan had temporarily overtaken the USA in average
income per head, at least according to Japanese official statistics. For the
five major non-communist economies the comparative per capita income
figures, in descending order, for 1988 were as follows; Japan $23,382;
USA $19,813; West Germany $19,741; France $16,962; UK $14,658
(Institute of Social and Economic Affairs, Statistical Abstract, Tokyo,
October 1991, 12). Based on the secure backing of a large and growing
home market, Japanese exports soared to give it the highest balance of
payments surpluses ever earned by any country in absolute terms,
reaching $87 billion in 1987 and giving an annual average of around $60
billion for the five-year period to 1989 (table 10.3). These export earnings
have been shared among increases in Japan's holdings of gold and foreign
exchange reserves, aid to Third World countries, and above all in the
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
593
form of direct and portfolio investment abroad. They also led to a
substantial reduction in Japanese import tariffs and to continuing
attempts to reduce Japan's many subtle forms of 'invisible' import
barriers. The external flow of capital has been strongly supplemented by
the diversion of domestic savings from Japan to benefit from the much
higher rates of interest available in the USA. Japan has been exporting its
goods, its savings and, as a method of getting around quota restrictions,
its factories also, in the form of direct investment abroad. Most of the
Japanese investment has naturally gone to the USA, its largest export
market, while substantial amounts have also been invested in Britain as a
gateway to the EC, bringing significant benefits in reducing regional
unemployment. Thus in the mid-1970s the present writer commented
that 'Japanese firms, from what is still likely to be the world's fastest
growing economy, are already evident in Wales and will probably
become an increasingly important source of overseas investment' (Davies
and Thomas 1976, 198). Despite occasional carping criticism of Japanese
purchases of highly visible investments like the Rockefeller Centre in
New York or the former Financial Times building in London, most
Japanese investment has had positive effects on the recipient countries,
whether backward or advanced. The USA's double deficits have been
substantially financed by Japanese investments, without which US
interest rates would have been higher, with greater braking effects on US
growth. Japan, even more than Germany, has thus from time to time
acted as the locomotive pulling other economies along.
It is a well-researched thesis that the total value of financial insti-
tutions rises faster than national wealth, a feature known to economists
ever since the pioneering work of Professor Goldsmith as the 'Financial
Inter-Relations Ratio' or FIR (Goldsmith 1969). It should therefore
come as no surprise to note that whereas Japan's economy in absolute
terms is the non-communist world's second largest, after the USA,
when reckoned in terms of the total value of its financial institutions
Japan has for some years been far and away the world's largest. Thus
Yaichi Shinka, professor of economics at Osaka University, in an
illuminating article on 'Japan's Positive Role as the World's Banker',
points out that 'People tend to think of Japan as an economic
superpower, but its financial presence . . . more than anything else
Japan is a Financial superpower' (1990, 22). One of the conventional
conclusions of FIR theory, namely that the role of banks eventually
diminishes as that of other financial institutions increases, may not
follow in countries which like Germany and Japan practise universal
banking or include a very wide functional range of institutions under
the designation of 'banks'.
594
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
Stagnation and the limitations of monetary policy, 1990-2002
After enjoying over three decades of remarkably high growth, the
economy, spurred on by an irrational exuberance which preceded and
far exceeded the US version, entered a 'bubble' phase in the late 1980s
which then burst to be followed by a seemingly unending period of
stagnation, deflation and lost output. The miracle had turned into a
bewildering misery that monetary policy seemed incapable of
alleviating. During the bubble phase equity and property prices reached
such astronomic heights that the apparent value of Japan's imperial
palace exceeded that of the whole of California. The Nikkei stock
exchange index which had soared to a peak of 39,915 by December 1989
plunged to 14,309 by August 1992 and fell again to as low as 9,504 by
October 2001. The close, cosy relations between industry, commerce
and banking which had been a key factor behind the miracle, now
worked in reverse as the assets held by the banks fell so far in value as to
render many of them technically insolvent, reducing their capacity to
lend, while the support given by the monetary authorities to bail out
failing firms and banks pushed Japan's already high fiscal deficit to over
6 per cent and its public sector debt to over 120 per cent of GNP in
2001, the highest of all the world's rich countries. Consequently the
extent to which the Japanese Ministry of Finance felt able to apply a
more relaxed fiscal policy was severely constrained. As for reliance on
monetary policy this was also limited because the economy was caught
in a vicious form of the liquidity trap. Thus although nominal interest
rates were reduced practically to zero consumers and businesses failed
to respond in the traditionally expected manner, i.e. by increasing their
spending on goods or services or on investment. When deflation causes
investing to seem more risky and unprofitable and tomorrow's prices
appear lower than today's then the retention of cash as a safe and
appreciating asset seems perfectly logical to the individual business or
consumer even though it is anathema to the economy as a whole.
Keynes's explanation of the liquidity trap in the deflationary 1930s
turns out to be an apt description of the dilemma facing the Japanese
monetary authorities at the beginning of the twenty-first century: 'In a
bad depression when preference for liquidity is high and the expecta-
tions of entrepreneurs for profitable investment are low, monetary
policy may be helpless to break the economic deadlock' (Dillard, D,
1948, p. 178). Since the downturn in the USA in 2001, deepened by the
terrorist attacks of 11 September, the world as a whole would greatly
benefit if Japan could take over, at least in part, the locomotive function
previously played by America. Monetary policy may have its
ASPECTS OF MONETARY DEVELOPMENT IN EUROPE AND JAPAN
595
limitations, but it need not be impotent. If accompanied by appropriate
improvements on the supply side, it still has a role to play on the
demand side to help in bringing the world's second most powerful
economy closer to its imposing potential. Up to the present time,
however, Japan's monetary policy seems to be providing history's best
example of that particularly unprofitable exercise - in a phrase
attributed to Keynes - of pushing on a string. Despite Mitsuaki Okabe's
view, in The Structure of the Japanese Economy, that 'In Japan
Keynesian thinking among economists has a strong tradition' yet,
unfortunately, 'there is (still) strong resistance to deficit spending in the
Ministry of Finance' (1995, p. 284). The asymmetry of monetary policy
remains a challenge fraught with enormous costs if not tackled with
sufficient vigour. In 2001 Japan 'was still suffering the consequences of
the collapse of the bubble economy a decade earlier' and, 'given the
authorities' persistent inability to deal with these issues . . . the future
was likely to bring only more of the same' (B.I.S. 71st Annual Report,
Basle, June 2001, p. 7).
11
Third World Money and Debt in the
Twentieth Century
Introduction: Third World poverty in perspective
Although there are hundreds of millions of relatively well-to-do people
in the world today, far more than ever before, yet at the same time it is
also true to say that most of the world's inhabitants remain desperately
poor. The relatively rich, lucky to be born in industrialized countries,
form a substantial and powerful global minority, whereas the majority
of the world's population, concentrated mostly in what has come to be
called the Third World, suffers from chronic poverty. Individuals and
even certain countries may rise above such poverty, but up to now these
are rather exceptional. The general rule is that while most of the
inhabitants of the western industrialized nations have risen well above
abject poverty, most countries of the Third World appear to be caught
in a monstrous poverty trap. Economics is now more than ever before a
study not only of the wealth of nations but also of the poverty of
nations. With the ending of the Cold War in the 1990s, greater
opportunities exist to help deal with what has become the major
problem facing mankind, namely of enabling millions of the world's
poorest men and women to earn a decent living for themselves.
Although 'development' means more than just economic growth, the
latter provides the essential fundamental basis for the wider
enhancement of life.
The term 'Third World' is so vague, variable and elastic that its use in
economic analysis should always be qualified. The term originated
from the post-1950 international political agenda as indicating those
countries, mostly in Africa and Asia, which were non-aligned as
THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
597
Table 11.1 National contrasts in income (1975 and 1985) and growth
(1973-1985).
Real
annual
growth
US dollars per head rate %
1975 (% USA) 1985 (% USA) 1973-85
IVlaii
on
(l.Z/)
1 Aft
/A AQ\
(V.V7)
1 ft
India
1 ^0
lJU
a 1 1\
\L.VL)
Nigeria
310
(4.39)
760
(4.63)
-2.5
China
350
(4.96)
1440
(8.78)
5.6
Algeria
780
(11.0)
2530
(15.43)
2.6
South Africa
1320
(18.7)
2010
(12.26)
0.0
Greece
2360
(33.4)
3550
(21.65)
1.4
United Kingdom
3840
(54.4)
8390
(51.20)
1.1
Libya
5080
(72.0)
7500
(36.40)
-2.6
France
5760
(81.6)
9550
(58.23)
1.6
West Germany
6610
(93.6)
10940
(66.71)
2.1
USA
7060
(100.0)
16400
(100.00)
1.4
Sweden
7880
(111.6)
11890
(72.50)
1.0
Switzerland
8050
(114.0)
16380
(99.88)
1.0
Kuwait
11510
(163.0)
14270
(87.01)
0.3
Source. World Bank Atlases 1977 and 1987.
between, first, the capitalistic western world, which looked to the USA
as its leader, and second the communist countries, which looked to the
USSR for leadership. Because policies which affected everybody were in
fact being decided by the two superpowers and their supporters, in the
northern hemisphere mostly, those countries to the south of these two
blocs attempted to adopt common 'Third World' policies and attitudes
to look after their own interests. Belief in such countervailing power was
given an exaggerated boost when OPEC, whose numbers had grown
from the original five countries of 1960 (four Gulf states plus Venezuela)
into a dozen in 1973, had grown sufficiently powerful to enable them to
force a quadrupling of the price of oil within the following year.
However, as well as damaging the West, it was the non-oil 'less
developed countries' (LDCs) that were hardest hit. This triggered a
special session of the UN General Assembly in 1974 to call for the
implementation of a 'new international economic order'. However, just
as the coming of political independence to the former colonies did not
bring with it economic independence, so the progress of the Third World
598
THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
countries has failed to live up to the earlier expectations of catching up
with the West, while their inability to service their vast international
debts put a brake on their growth. Some idea of the extent of the task
required to catch up with the West is given in table 11.1 which selects
fifteen countries, ranging from the poorest to the richest, from the 184
countries detailed in the World Bank's Atlas for 1987.
It should be emphasized that figures such as those in table 11.1 should
be used only to convey rough orders of magnitude rather than precise
differences. Statistics in a number of LDCs are notoriously unreliable
(though the IBRD and IMF have over many years struggled to improve
them and their overall comparability). Secondly, the US dollar, used as
the common denominator, has fluctuated so much in the foreign
exchange markets that one is forced to rely on a rather elastic ruler.
GNPs are simply one component in the assessment of living standards,
and because of the high degree of self-subsistence in many LDCs, their
low figures, and therefore the degree of superiority of western countries,
tend to be considerably exaggerated.1 Nevertheless when all allowances
have been made for these and similar limitations, the contrasts in living
standards are startling. Table 11.1 shows that the average income per
head in 1975 in Kuwait, at $11,510, was over 120 times as high as that of
the poorest, Mali, and 100 times as high in 1985. When oil prices were
relatively higher and the exchange rate of the dollar lower, as in 1980, the
then richest country, the United Arab Emirates, enjoyed a per capita
income over 400 times that of the then poorest, Laos, and over 200 times
as large as that of Bangladesh, with $130. In order to overcome the
volatility of comparisons with the richest oil exporters, table 11.1
provides percentage comparisons with the USA, which for example show
Mali's average per capita income at around 1 per cent of that of the USA.
Alternative measures based on purchasing power parity have been
produced by the UN which in the case of some LDCs reduce the per
capita differences by factors of between 1.5 and 3.5. All the same the
differences remain vast. It has been well said that 'the main effect of
better statistics is not to make us change our views about the extent of
poverty in the underdeveloped countries, but rather to make us attach
different numbers to the scale of poverty and wealth' (D. Usher 1966,
40). It does not make much difference to a drowning man whether he is
10 feet or 30 feet under the water: particularly if the lifeguards confine
their energies to disputing their measurements.
Data for aggregating countries' GNPs into total world annual
production are not available, but the World Bank does provide such
statistics for 151 countries comprising around 85 per cent of the world's
1 SeeB. Lomborg,2001.
THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
599
population. The figures for 1985 show that the thirty-five poorest
countries, with a total population of 2,318,000,000, had an average
income per head of only $280. Their share of the total product of the
151 countries listed came to only 19 per cent. On the other hand the
richest forty-eight countries with a total population of 776 million (18
per cent of the total of the 151 countries) enjoyed an average income per
head of $11,630, or forty times that of the former group, and produced
81 per cent of the aggregate annual product of the 151 listed countries
(World Bank Atlas 1987, 16). In plain terms, a fifth of the world's
population, situated in the industrial countries, produces around 80 per
cent of the world's income, while over four billion people, mostly in the
Third World, are able to produce between them only about a fifth of the
world's gross annual product.
Although it is legitimate, and indeed essential, to use such contrasts
(bearing in mind their limitations) to place Third World poverty in
perspective, and to draw attention to the massive nature of the
economic problem facing the world at the end of the twentieth century,
the polarization between 'developed' and 'undeveloped' countries
should not lead us into the mistaken but common belief that there is an
unbridgeable gap between rich and poor countries. On the contrary, as
is hinted in the range shown in table 11.1, if all the countries of the
world were arranged in ascending order there would be a continuous
gradation from the poorest to the richest without any perceptible gap -
more like beads on a string rather than uneven, shaky stepping stones
across a stormy river. This important fact, plus the successful
experience of a number of quite different countries that have been able
to achieve high rates of growth over a considerable period, offers sound
prospects for sober optimism, even among economists. The variable
picture of growth and decline in the period 1973—85 given in table 11.1
is supplemented in table 11.2, where the record of the ten most
successful countries, in terms of economic development, during the
same thirteen-year period is given.
Of the 184 countries listed only ten had growth rates, allowing for
inflation and the growth of population, of over 5 per cent annually over
the thirteen-year period from 1973 to 1985 (or eleven if Montserrat with
a population of only 12,000, and a growth rate of just 5.1 per cent, is
included). These countries were spread among the poor to middle-
income groups. None came from the industrialized countries and none
was blessed with significant oil deposits. For example the
corresponding growth rate for Japan was 4.5 per cent and for Saudi
Arabia 1.7 per cent. It is interesting to see that these ten fast-growing
economies were spread among small countries like Tonga, medium-
600 THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
Table 11.2 The ten fastest-growing economies, 1973-85.
Population Real annual
1985 (millions) growth
rate % GNP per
capita
Malta
0.36
6.7
Singapore
2.55
6.5
Tonga
0.097
6.4
Botswana
1.07
6.4
Hong Kong
5.43
6.3
Netherlands
Antilles
0.26
6.2
China
1041.00
5.6
S.Korea
40.65
5.5
Egypt
47.11
5.4
Jordan
3.51
5.2
Source: World Bank Atlas 1987, 'Statistics on 184 Countries'.
sized countries like South Korea's 40 million and Egypt's 47 million,
up to, above all, China's one billion. Significantly, excluding Kiribati
(which has a population of just 64,000), only one of the 184 countries
registered a fall of over 5 per cent in growth during the period
1973-85. That was one of the world's wealthiest, Qatar, with -8.5
per cent. This fall, from a very high base, nevertheless illustrates the
oil producers' fears, most prominent among those with low reserves,
but universally noticeable, that their drive to full industrialization
might be aborted because of the uncertainty of future energy prices.
It is still largely true, as Robert Stephens concluded in his study of
The Arabs' New Frontier, that 'The Arab states, like most countries
of the developing world, seem uninhibitedly committed to following
as far as possible the path of "modernisation" which the industrial
countries have already trodden' (1976, 262). Although a flood of
petro-dollars has undoubtedly eased the path of OPEC's develop-
ment, the example of the ten fastest-growing economies suggests that
the balance between the role of finance and of other factors is a
complex one. We shall now examine some of the changing views
regarding the part played by financial factors in the development of
former colonies during the twentieth century as decisions on mone-
tary policies moved from foreign to indigenous hands.
THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
601
Stages in the drive for financial independence
The former colonies and dominions in the Third World, with those of
Britain providing the main examples, have gone through four distinct
stages, which though varying in degree and timing from place to place
exhibit certain common characteristics. In the first stage, already in
being at the beginning of the twentieth century, parts of the British
currency system together with British-based commercial banking were
extended piecemeal to the colonies to answer the demands of trade with
the 'mother' country. These movements included the spread of branches
of British banks, mostly to the main ports of the colonies, to assist
exports to and imports from Britain, and the establishment of Currency
Boards in East and West Africa, Malaysia and the West Indies. Free
trade and laissez-faire shielded by the Pax Britannica and still inspired
by Adam Smith, ruled international trade, most of which was
conducted in sterling. Internal, indigenous development in the colonies
was a tangential by-product of overseas trade. In small colonies like
Singapore and Hong Kong, where overseas trade exceeded domestic,
international trade was a powerful spur for domestic growth. In large
countries like India and Nigeria overseas trade was too small and too
distorting to have much impact on indigenous economic development
within the vast interiors where most of the population lived. Expatriate
currency and banking in the case of such large countries seemed at best
irrelevant and at worst diverted finance from internal projects. Such
complaints were of modest dimensions during this first stage, which
lasted from about 1880 to 1931.
The second stage began with the emergence of the 'sterling area'
when Britain went off the gold standard in 1931, followed by the ending
of free trade and a corresponding increase in imperial preference from
1932 onwards. This second stage also saw the substantial growth of
sterling assets credited to the colonies and dominions during and for
some years after the Second World War. The traditional pattern of
indebtedness as between Britain and the Commonwealth had gone into
reverse, while the reduction in the dollar value of the sterling balances
through the unilateral decision to devalue sterling in 1949 forced the
pace of change towards financial and political independence in the
remaining colonies, following the prior examples of India and Pakistan
in 1947. Quite apart from any direct influence, positive or negative, that
financial factors had over economic growth, it became clear that they
played a key role in the pace of political independence, which latter was
confidently expected to remove the shackles of 'imperial exploitation'
from indigenous enterprise.
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THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
The third stage, from about 1951 to 1973, thus brought with it
political independence, indigenous central banks and the apparent
ability to decide one's own monetary policy as part of a centralized
planning process. Significantly, these changes coincided with the zenith
of belief in a powerful blend of Keynesian and Rostovian ideas. The new
governments eagerly welcomed these timely twin concepts in political
economy which promised so much for the ambitious medium-term
plans enthusiastically produced by and for the ex-colonial countries.
Some fortunate newly industrializing countries, (NICs) even achieved
their own economic 'miracles'. By the early 1970s, however, most LDCs
were beginning to realize that neither independence nor planning were
guarantors of growth, while any remaining euphoria was abruptly
ended (except of course in the oil-producing countries themselves) with
the quadrupling of oil prices in October 1973.
The fourth and final stage, after 1973 has seen a gradual return to
economic realism for most countries with a greater emphasis on free
markets, thus giving financial institutions a higher profile than in the
previous stage. As confidence in central planning and in
Keynesian-Rostovian ideas evaporated, so there arose a greater
acceptance in theory and in practice of the concepts of Professor R. I.
McKinnon concerning the importance of 'financial deepening'. This
involved in particular the removal of controls over interest in order to
stimulate savings and to enforce market disciplines on lenders and
borrowers. However in a few countries independence meant movement
in the opposite direction, allowing even greater controls and preventing
most customary forms of interest payments. These experiments in
Islamic banking have been exceptions to the more general rule of a
worldwide move towards greater financial and commercial freedom
embracing, from the late 1980s, even most of the former communist
countries (Elzubeir 1984). Freer markets in goods and money are seen as
essential ingredients of growth. Thus towards the end of the century, as
at its beginning, the ideas of Adam Smith rather than those of Karl
Marx are in the ascendant. It was in this last period that
overborrowing, stimulated during the euphoric third stage, inevitably
matured into the crippling burden of Third World debt - a problem
which because of its special importance will be examined as a separate
topic later in this chapter. In the mean time some specific examples of
the problems associated with the development of financial institutions
and policies in some of the former colonies will be analysed within the
pattern of the general stages already outlined, concentrating first on the
monetary history of colonial Africa.
THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
603
Stage 1: Laissez-faire and the Currency Board System, c. 1880-1931
Within a remarkably short space of time much of Africa has traversed
the whole span of monetary development from substantial reliance on
primitive money to the establishment of sophisticated indigenous banks
and other financial institutions, using expatriate currency and banking
systems as an essential bridge between these two extremes. Trade
followed the flag, and banking followed in the wake of trade. Demand
therefore preceded supply, with the important corollary that banking
profits were more likely to arise than when, in later stages, artificially
contrived opening of branches in places where actual demand lagged
woefully behind anticipated, 'potential' demand brought about such
heavy losses as to cause the overbranched banks to fail. In any case, as is
shown in chapter 2, primitive forms of money such as cowries and
manillas continued to be in widespread use in parts of West Africa right
up to the 1960s; while the records of the United Africa Co. show that it
still found it essential to trade in manillas (imported from the
manufacturers in Birmingham) for some years after the Second World
War. In this connection it is worth noting that both these main kinds of
primitive moneys were imported; therefore increases in domestic money
supply depended almost entirely on achieving export surpluses - a
feature preceding the advent of foreign banks. That such moneys could
be obtained only externally helped to keep up their value and hence
their attractiveness. External trade was and remained the key to
monetary development.
The first rudimentary banking operations were carried out by trading
companies like the Royal Niger Co. (chartered in London in 1886), John
Holt & Co., the United Africa Co., Elder Dempster & Co. and so on.
Banking proper came late to West Africa, but by the 1890s the ancillary
financial activities of the trading companies had grown sufficiently
large to justify hiving off such operations on to fully fledged banks.
Import and export trade between West Africa and Britain, which had
remained rather stagnant for fifty years from 1840 to 1890, then began
to accelerate from an average annual value of £2.7 million over the five-
year period 1886-90, to £6.3 million in 1896-1900 and to £16.3 million
in 1906-10. Bearing in mind the relatively stable prices of that period,
this was a sixfold increase in real terms in just twenty years, supplying a
springboard for financial development (Fry 1976, 32). The chief
executive and largest shareholder in Elder Dempster, Alfred Jones, was
about to begin forming a bank in Lagos when he was made aware of the
decision of the directors of the African Banking Corporation, based in
Cape Town, to open a branch in West Africa. Thus, when this first West
604
THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
African bank opened in 1892, it operated from Elder Dempster's office
in Lagos with Elder Dempster's agent, George Neville, as its first
manager. Mr Jones right from the start considered it as his own bank
and soon persuaded the African Banking Corporation to concentrate its
activities in southern Africa while he with Mr Neville took the lead in
forming the Bank of British West Africa, which began operations from
the same Lagos office in March 1894. It opened a branch in Accra on
the Gold Coast in 1896 and in Freetown, Sierra Leone, in 1898. A rival
institution, the Anglo-African Bank, sponsored by the Royal Niger Co.,
was set up in Calabar in 1899, encroaching on the business of BBWA,
with expatriate traders especially benefiting from the cutthroat
competition, at least until the competitor - which had been called the
Bank of Nigeria from 1905 - was absorbed into BBWA in 1912.
Although the great majority of the bank's customers were drawn from
expatriate traders, government agents and the military and did not
directly include many West Africans, yet there is some justification for
the view given in the Lagos Government Report for 1896 which stated
that BBWA had 'benefited the Colony in many ways and supplies a
want which was much felt in the past' (Fry 1976, 29). One great boon in
which the banks had given assistance was in the introduction and
development of the cocoa industry to supplement previous
overdependence on palm oil. Exports of cocoa began in 1891 with a
mere 80 lb but rose rapidly to 10,000 tons by 1906 and to 50,000 tons in
1913. Finance to cover the seven years from planting to harvesting was
in part supplied by the banks. Similar efforts with rubber came to
naught. The banks were not invariably overcautious and short-sighted.
The sixfold growth in external trade was more than matched by a
spectacular rise in the import of the kind of money strongly preferred
by the indigenous traders, namely cash, predominantly in the form of
sterling silver coins. This love of silver was also in line with long-
established British government policy, for as early as 1825 it was made
clear by an Order in Council that 'both on grounds of policy and
expediency ... it was desirable to introduce British silver coins into the
circulation of the Colonies' (Greaves 1953, 10). Henceforth, according
to Lord Chalmers's History of Currency in the British Colonies, 'the
shilling was to circulate wherever the British drum was heard'
(Chalmers 1893, 40). It must have been deafening in West Africa at the
turn of the century. The annual amount of silver issued for West Africa
rose from an average of £24,426 in the five years to 1890 to reach
£847,850 by 1911, a rate which 'actually exceeded the amount issued for
use in the UK' (Fry 1976, 70). Trade had increased sixfold: the cash
required to support it had increased by over thirty times.
THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
605
Furthermore when the colonial banks returned silver coin deposits to
Britain, these were in practice accepted at par even for large amounts
and so were virtually convertible into gold. Thus whereas silver was
only of limited legal tender in the UK, this was not strictly the case for
colonial banks' silver holdings. When colonial holdings were low this
was no problem, but by 1911 the matter had become of such major
concern that the government appointed an official committee to make a
thorough investigation of the colonial monetary system. The Emmott
Committee Report (Cd 6426) was issued in June 1912 and on its
recommendations the Currency Board System was established in stages
throughout the colonies — until they obtained their political
independence. This was some fifty or so years later in the case of the
West African colonies of the Gold Coast, or Ghana, and Nigeria. The
two essential features of the Currency Board system were, first, that the
British government formally assumed responsibility for the issue of the
appropriate currency in each of a number of geographically contiguous
regions of the colonial empire; and secondly the UK government
guaranteed that the values of these currencies were exactly the same as
that of sterling. Dr Ida Greaves put the point lucidly as follows: 'while
the currency Authorities in various colonies have issued the types and
denominations which local custom required, every colonial currency is
really sterling in a different place from the United Kingdom' (1953, 10).
In some respects there was therefore a logical similarity in principle
with the later development of the Eurodollar, in both being convertible
currencies held outside the home country, although in the case of the
colonies all the decisions regarding convertibility remained in London.
Appropriately enough, since it was that region that had imposed the
biggest drain on sterling coins, it was the West African Currency Board
(WACB) that was the first to be set up, hurriedly in 1912, covering
Nigeria, the Gold Coast, Gambia, Togoland and the British
Cameroons. It became the prototype for all the others set up later, such
as that for East Africa in 1919, for Central Africa a decade later, and for
the last to be formed, the short-lived Malayan Currency Board, in 1938.
Similar but less formal systems ruled in Fiji, Gibraltar, Malta and in the
West Indies, in which latter area Canadian banks and some US banks
competed strongly with those from Britain. The operations of the
Currency Board system lasted longest and were most clearly seen in
Africa, because there more than elsewhere the preference for sterling
silver coins was strongest, forcing the banks to maintain much higher
(and costlier) cash-to-deposit ratios than in other colonial areas. From
1917 onwards, to supplement its own coinage (produced by the Royal
Mint in London) the WACB issued its own banknotes. These, however,
606
THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
like the local bank cheques, were used mostly by traders and
government agents. In that same year the Colonial Bank, which had
been formed in 1836 in London, opened its first branch in West Africa:
it was absorbed into Barclays Dominion, Colonial and Overseas in
1925.
Adding to the burden of excessive reliance on silver coins was the
West African aversion to using gold for monetary purposes. Gold coins
quickly vanished to reappear as ornaments. Love of silver coins thus
imposed a huge and costly physical burden on banks and traders. Even
as late as 1949 the United Africa Co. complained of the heavy costs,
made worse by the poor state of the roads, of hauling several million
pounds' worth of silver to pay for the purchase of palm oil, cocoa and
other 'cash crops', bearing in mind that a three-ton truck could carry
only £10,000 in silver coins {Statistical and Economic Review, March
1949). When allowance is made for such down-to-earth practicalities,
then the monopoly granted to the BBWA from 1894 to 1912 of being the
sole importer of silver, and from 1912 to 1962 of being the sole agent for
the WACB, though doubtless a prestigious privilege, was not the blank
cheque it might at first seem. The agency fee, fixed at £4,000 p.a. in
1927, remained ridiculously low considering inflation and the vast
increase in the board's currency circulation, which at its peak in 1956
had risen to £125 million (Loynes 1974).
Any sizeable credit accruing to banks, companies, government
departments or agencies which was surplus to their immediate
requirements locally, was transferred for deposit in the London money
market, for there were no local avenues for safely earning a return on
liquid funds. The London money market was thus the intermediary for
colonial banks and businesses just as it was for such institutions within
the UK. The Currency Boards and the colonial governments themselves
were legally obliged to invest in UK and other Commonwealth
government stock. The counterpart was the privilege of trustee status
conferred by the Colonial Stock Act of 1900 (and its amendments) on
the London issues made by or for the colonies and dominions. This
greatly added to the value and marketability of colonial issues. In 1929
a Joint Colonial Fund was formed in London to pool the surpluses from
the various colonial sources so as to earn better returns than could be
obtained from the smaller, separate sums. Short-term funds from the
colonies were profitably and safely invested in London in readily
realizable forms, while London provided long-term funds for capital
investment in the colonies and dominions. In general the system worked
well. If the colonies were to benefit from a fully convertible currency of
the type they seemed to prefer, and also to enjoy some of the benefits
THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
607
supplied by modern, viable and reliable banks, then the combination of
the Currency Board system with expatriate banking was justified by
results. But this symbiotic situation began to change from the 1930s
onward.
Stage 2: The sterling area and the sterling balances, 1931-1951
Free trade and laissez-faire were largely discredited and therefore
discarded when the international gold standard broke up in the 1930s.
Nevertheless external trade and payments continued to exert their
customary force as key factors in colonial monetary development at a
time when the world split up into two main monetary blocs, the sterling
area and the dollar area. Managed trade and managed finance were two
sides of the same coin. Controls on trade and finance increased during
the 1930s, rose very naturally to their zenith during the Second World
War, but then were maintained at quite a high level in the sterling area
for a surprisingly long period thereafter. The sterling area comprised all
those countries between which payments were mainly or entirely made
in sterling, which therefore kept their reserves in sterling and which
found it convenient or imperative to rely on the financial services of the
City of London, which had long been (and still remains) the largest
foreign exchange market in the world. At a time of growing restrictions
on international trade and payments, the sterling area remained the
largest area in the world within which payments could freely be made in
what in the 1930s was still the most widely accepted currency. In
Sayers's well-known phrase, 'sterling was always useful and sterling was
always available' (1953, 148). Because the trade of sterling area
members was mostly with each other and especially with the UK, it
followed that when sterling went off the gold standard in September
1931, and thus forced countries to make a choice, all the independent
dominions (except Canada, which was drawn to the United States)
chose to cling to sterling, as did a number of non-Commonwealth
countries such as Portugal, the Scandinavian countries, Egypt, Iraq,
Jordan, Argentina and for a time even Japan. The colonies had no
choice in the matter, but even if they had, their existing trade and
financial links would have made any other course extremely unlikely.
All members kept their currencies fixed to sterling and kept their
exchange reserves entirely, or almost so, in the form of sterling balances
in London.
The massive depression of the 1930s - which was the basic cause of
the break-up of the gold standard - was in fact substantially less severe
in Britain than in the USA. Thus, as an American authority on the
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THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
sterling area has pointed out, US national income fell by no less than 50
per cent from 1929 to 1932, compared with a fall of 15 per cent in
Britain.2 Furthermore Britain's initiative in strengthening Common-
wealth Preference by the Ottawa Agreement of 1932 provided a more
stable basis for trade arrangements than could be obtained elsewhere at
the time. 'Greater stability of British imports than those of other major
industrial countries, and of the US in particular' was 'a significant
attraction of sterling area membership' (Bell 1956, 334). By an Order in
Council of 3 September 1939 the sterling area system of controls was
tightened so as to make it in effect an instrument of war. Although most
current payments within the area remained free, controls on capital were
brought in while all payments beyond the sterling area were strictly
controlled. All dollars and other 'hard' currency receipts were
centralized in London's 'dollar pool' with disbursements requiring
Treasury authority exercised by its agent, the Bank of England. The need
for such pooling may be gauged by the fact that at their lowest point, in
April 1941, Britain's gold and dollar reserves fell to only £3 million.
While the war drastically curtailed Britain's export earnings, those of
the rest of the sterling area (RSA) grew enormously. In addition to the
UK's normal expenditure on food and raw material from RSA, there
were the vast new current expenditures on supplies of all kinds for the
military forces together with emergency capital spending on harbours,
roads, railways, airfields, barracks and so on around the world, mostly
within the sterling area. Because British manufacturing capacity was
reserved for war purposes, as was shipping capacity, the swollen
incomes of RSA could not be spent on customary British manufactured
exports. As a result RSAs 'unrequited' export earnings were
increasingly accumulated in London as 'sterling balances'. These grew
to such an extent that not only was much of the RSAs previous
indebtedness to the UK repaid but also resulted in the RSA becoming
substantial short-term creditors, and as time went on, in the medium
term also. London-held sterling balances, largely in the form of
Treasury bills and other short-term instruments, rose by almost £3
billion between 1938 and 1945, by the end of which year they stood at
£3,547 million. Despite some significant changes in composition, they
stood at around that same level over the following twenty years. This
fundamental change in Britain's position from being a large creditor
into becoming a large debtor - and to poorer countries at that - had
important consequences for her and for the Commonwealth.
The debts could, of course, like those of a number of other nations in
similar circumstances, have been repudiated, cancelled or at least
2F. W. Bell (1956).
THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
609
written down. They represented part of Britain's huge war effort on
behalf of the RSA as well as for herself. But this was not the British
attitude to debts, as was plainly stated by the Chancellor of the
Exchequer, Sir Stafford Cripps, in Parliament {Hansard, 19 November
1949). Agreements were reached to prevent the balances from being run
down too rapidly, and particularly to prevent the draining of the dollar
pool, despite the strong desires on the part of the RSA to purchase
American capital goods to speed up their own economic development.
Although the sterling balances were not written down, their value was
eroded by inflation, unconsciously perhaps, and also by the deliberate,
and unavoidable, sudden, decision of the British government to devalue
sterling by around 30 per cent, in terms of the dollar in September 1949.
The colonies could have no say in the matter while 'there were evidences
in almost every monetarily-independent sterling area country of
dissatisfaction with the impact of sterling devaluation on the position
of overseas members' (Bell 1956, 425). Furthermore Britain's cheap
money policy from 1932 to 1951 meant that the interest earned on
sterling balances, which had previously been a highly attractive feature
in pulling RSA funds to London, had become so low that a strong
stimulus was given to the development of money markets in the
dominions to supplement the effectiveness of their new central banks.
These same attitudes and pressures were to lead a decade or two later to
similar, if weaker, results in the colonies.
Whereas the dominions had managed to reduce their blocked London
balances by 1951, those of the colonies rose year on year to reach over
£1,000 million by then. In a parliamentary debate in November 1951
the Secretary of State for the Colonies spoke of 'the alarming growth of
the sterling balances of the Colonies', adding that 'a system of colonial
development which leaves the Colonies to finance the Mother Country
to the extent of £1,000 million cannot continue unchecked' (Greaves 1953,
82). The well-known development expert, Professor W. A. Lewis, published
his opinion, in the Financial Times of 18 January 1952, that 'Britain
talks of colonial development but on the contrary it is African and
Malayan peasants who are putting capital into Britain. For the first time
since free trade was adopted in the middle of the nineteenth century, the
British colonial system has become a major means of economic exploita-
tion.' Similarly The Economist oi 21 April 1951 after pointing out that
'Many of the largest accumulators [of sterling balances] are colonial
territories whose policy is determined in London' went on to say, 'The
momentum of past habits will still make it possible for the welfare state
and cosseted economy of Britain to be maintained on the backs of other,
and in many cases, poorer countries' (quoted by Greaves 1953, 822).
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Thus the early 1950s marked a turning-point in that it came to be
widely recognized that no longer could the economic development of
the colonies be left to occur as a by-product of expatriate banking, nor
could the monetary policies of the colonies be uniformly and
unilaterally decided by the Treasury and Bank of England where the
economic interests of the UK would most likely and most naturally be
the predominant consideration. The economic and financial
complementarity of the pre-war Commonwealth had been drastically
altered by a war which had accelerated the political, economic and
financial motives for independence.
Stage 3: Independence, planning euphoria and banking mania,
1951-1973
Summarizing the results of an international conference on National
Economic Planning convened by the US National Bureau for Economic
Research held at Princeton in 1964, Professor Millikan recalled that
from the early 1950s 'the idea of economic planning was beginning to
gain wide popularity (in LDCs) as a necessary and sometimes sufficient
condition for economic growth' and that, having just gained political
independence, the new leaders of the former colonies 'turned naturally
to economic planning as a tool' because 'the emerging theories of
economic development being spawned by economists suggested that
only through conscious and determined government policy could those
countries escape from the low-income trap in which they found
themselves' (Millikan 1967, 3—4). These theories were a blend of
Keynesian concepts on macro-economics and national income
accounting (supplemented with Tinbergen's input-output matrices
where data were optimistically believed to be adequate) plus Professor
W. W. Rostow's theory of the stages of economic development which
seemed to promise that, given adequate and properly developed
investment programmes, the LDCs could 'take off into self-sustaining
growth'. During the period 1952-73 almost all British colonial
territories became politically independent, following the examples of
India and Pakistan in 1947. The establishment and nurture of their own
central and commercial banking systems followed by their own money
and capital markets were seen as vital parts of this planned process of
economic development. Nigeria affords one of the best examples of this
process, first because it was the largest, and secondly and more
importantly, because in no other colony have indigenous writers
published their own insights more than in the case of Nigeria, with e.g.
THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
611
the most authoritative, clear, controversial and prolific of these being
Professor G. O. Nwankwo, whose personal experience has spanned the
monetary spectrum from using cowrie shells as a boy to becoming an
executive director of the Central Bank of Nigeria and chairman of one
of its largest commercial banks.
The main features which require to be examined in assessing the
remarkable development of Nigerian banking and finance from around
1951 to 1973 include, first, the struggle to gain a central bank; secondly,
the effectiveness of the indigenization of expatriate banking; and
thirdly, the causes and consequences of 'boom and bust' in indigenous
commercial banking. With regard to central banking in LDCs, two
theories came strongly into contention at this time: the conservative,
traditional view, which may be called the 'coping-stone' theory, versus
the newer, progressive 'cornerstone' theory. The coping-stone theory,
maintained that the erection of a central bank should be undertaken
only after the financial system of banks and money markets had already
been built up to a substantial degree. A central bank's two main
weapons, bank rate and open market operations, would be useless in
undeveloped financial systems, leaving the central banker and his staff
with nothing to do but twiddle their thumbs. In such circumstances a
central bank would be a white elephant, an ostentatious, costly,
unnecessary, empty symbol. Worse still, in order to get indigenous staff
it would have to divert to itself and find artificial work for the very kind
of skilled labour that was especially scarce in LDCs. These scarce,
skilled resources would be much more productively employed in
building up the banking system in the challenging rural areas instead of
being cosseted in the capital city. The opposing cornerstone (or
foundation-stone) theory saw, as an urgent necessity, a positive role for
a central bank as a catalyst for development, training other bankers,
instituting an independent monetary policy more appropriate to
indigenous needs, assisting the government in its economic planning
and so on, rather than being simply or mainly an instrument of
economic stabilization. These competing views are admirably
illustrated in the seven-year struggle from 1952 to 1958 inclusive to set
up Nigeria's central bank.
Financial planning was only loosely integrated into the series of
macro-economic plans busily produced in West Africa during this
period. The first for any West African country was the 'Ten Year Plan
for Development and Welfare' produced by the colonial office for
Nigeria in 1946. This was followed, after Nigerian independence in
1960, by sequential five- to six-year plans doggedly produced despite
massive disruptions, negative or positive, such as the civil war (1967-70)
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and the oil crisis of 1973. Among the most important of a plethora of
investigations into monetary and banking conditions in West Africa
were the Paton Report (1948), the Trevor and Fisher Reports (both in
1952), the World Bank Report (1954), the Loynes Report (1957) and the
Coker Report (1962). The first of these deals mainly with commercial
banking, and so will be noted later. The main recommendation of the
Trevor Report on 'Banking Conditions on the Gold Coast and the
Question of Setting up a National Bank' was immediately implemented
when the Bank of the Gold Coast, that country's first indigenous bank,
was established. In 1957 when the country became independent, the
bank was split into two, with the Bank of Ghana becoming a bank of
issue and eventually taking on all the duties of a central bank, while the
other half, now known as the Ghana Commercial Bank, still 100 per
cent government-owned, carried on with its commercial functions.
Thus was overcome the widespread fear expressed by Dr Kwame
Nkrumah in his autobiography: 'Our political independence will be
worthless unless we use it to obtain economic and financial self-
government' (1961, 111).
In Nigeria financial independence took a little longer to arrive. In
1952 Mr J. L. Fisher, adviser to the Bank of England, was asked to
report on 'the desirability and practicability of establishing a central
bank in Nigeria for promoting the economic development of the
country'. He soon made it painfully plain that he thought the whole
idea to be undesirable, impractical and in any case premature. 'In his
orthodox approach to monetary problems, Fisher argued that it was
better to build the financial structure from the base upwards rather
from the top downwards' (Ajayi and Ojo 1981, 86). 'I conclude,' said
Mr Fisher with brutal frankness 'that it would be inadvisable to
contemplate the establishment of a central bank at the moment . . .
Moreover it is hard to see how a central bank could function as an
instrument to promote economic development' though it might be
considered 'in due course' (Nwankwo 1980, 4). The World Bank Report
of 1954 was rather less negative and gave some hope by suggesting the
formation of a State Bank of Nigeria as a halfway house in the direction
of central banking. This compromise was rejected and instead, as soon
as Nigeria was granted autonomy in internal matters in 1957, another
Bank of England official, Mr J. B. Loynes, was asked to give his advice
on how best to go about setting up a proper central bank. His 'Report
on the Establishment of a Nigerian Central Bank and the Introduction
of a Nigerian Currency' (1957) was quickly adopted and the Central
Bank of Nigeria began operations on 1 July 1959. The West African
Currency Board ceased to exist in 1962 as the new central banks in
THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
613
Ghana and Nigeria carried out their exciting new roles of tailoring
central banking operations to the needs of indigenous development so
as to demonstrate in practice the victory the cornerstone theory had
won over its old coping-stone rival.
Expatriate banks in the post-1951 period began participating much
more fully than ever before in the economic development of their host
countries, which nevertheless considered their actions to be far too little
and much too late. Names were changed to reflect decolonization, the
number of bank branches was considerably increased and local boards
of directors were set up with a few native directors. The BBWA dropped
'British' from its title in 1957, and in 1965 merged with the Standard
Bank (previously appended by 'of South Africa'); the renamed Barclays
DCO similarly de-emphasized its 'Colonial' title; the British and French
Bank, formed in 1948, became the United Bank for Africa in 1961, and
so on. But an expatriate bank by any other name was still resented as
foreign. Criticism was made of the slow process of Africanization in the
expatriate banks' staff, although, because of the huge increase in the native
civil service in the run-up to independence, these banks had many of
their best staff poached. The Bank of (British) West Africa increased the
total of its branches from thirty in 1945 to fifty-one in 1954, and up to
118 by 1963. Over many years such branches had been managed largely
by British staff; for instance, many Scots bankers when they completed
their training were attracted to the British overseas banks because far more
were trained than could find suitable posts in Britain (Gaskin 1965, 51).
The work of the Institute of Bankers deserves notice for its key role in
preparing the groundwork for indigenous control of banking. By 1970 its
overseas membership had risen to 13,000. The Lagos institute was set
up in 1963, and by 1970 when the Nigerian Institute of Bankers was
formed the Lagos branch itself boasted 5,000 members (Green 1979, 171).
Expatriate banks (and the trading companies) also assisted indispensably
in the early stages of the development of local money and capital markets.
Thus BBWA tendered substantially for the first issue of Treasury bills
made by the Gold Coast administration in 1954; in 1958 it granted the
Nigerian government a ten-year loan of $1 million in participation with
the World Bank's loan of $28 million to improve Nigerian railways; in
the same year it subscribed £50,000 towards the original capital of the
Development Corporation of Nigeria; in 1963 it loaned £1 million for
road building in Ghana, and for a number of years helped to finance the
early growth of Nigeria's oil industry. However, such concrete evidence
of expatriate involvement in internal development simply spurred on
the drive for financial independence, particularly with regard to the
needs of the vast numbers of small indigenous entrepreneurs.
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THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
According to research carried out for the Central Bank of Nigeria
over 80 per cent of the loans made by expatriate banks during the
period 1963-8 matured (nominally at least) within three months, and
95 per cent within twelve months. In 1970 just over half of their loans
went to purely expatriate enterprises with just a third to Nigerian
borrowers, the rest going to enterprises of mixed ownership (Nwankwo
1980, 75). Although the total lending by indigenous banks was very
small compared with that of the expatriates, the bulk of their lending
was to Nigerians (77 per cent), while 21 per cent of their lending was for
terms over twelve months. There had long been some substance behind
the vociferous case for indigenization. However, before we attempt to
assess the results of financial indigenization a brief glance needs to be
cast on the rise and fall of indigenous banking and on the new money
and capital markets.
Only three indigenous banks had been formed in Nigeria before
1945, one of which failed within a year of formation, another struggled
on for five years before failing, leaving only the original one, the
National Bank of Nigeria formed in 1933, to survive. Compared with
what was to come this ratio has to be considered a great success. A
native banking boom began in 1945 and rose to a veritable mania by
1952. The actual number of 'banks' so called remains a matter of some
dispute among the authorities because registration did not always result
in active banking operations; but there is no doubting the strength of
the boom. Between 1945 and 1948 some 145 banks were registered,
followed by a similar number in the subsequent four years. There were
no banking laws of any kind to attempt to regulate this flood. Concerns
about the dangers of such an uncontrolled rush, together with the
adverse publicity accompanying the losses suffered by depositors of the
Nigerian Penny Bank, which failed just a year after it had been set up in
1945, led to a commission of inquiry being set up in 1948 chaired by Mr
G. D. Paton of the Bank of England. His report's recommendations,
after four years' delay, resulted eventually in Nigeria's first law passed
to regulate the formation and operation of banking. All banks were to
be licensed. Minimum capital requirements, of 25,000 naira for
indigenous banks and 200,000 for expatriate banks, were demanded,
and later raised to take account of inflation. In the mean time, between
1945 and 1955, when the new rules were to come fully into operation,
the mushroom banks had enjoyed complete freedom of operation and
were managed by persons with little or no experience of banking.
Euphoria, incompetence, nepotism, corruption and widespread fraud
(vices not uncommon in the early stages of banking in the UK or USA)
made wholesale failure inevitable. By 1955 all these indigenous banks,
THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
615
except for only three, had failed. Although post-war booms and failures
had occurred elsewhere, the Nigerian example stands out as a classic
case of its type. By the mid-1950s the banking flood had become a
trickle. The public lost faith in indigenous banks unless, as was later the
case, they were either sponsored by or owned by one of the nineteen
State governments.
Immediately following the decision to set up a central bank a
committee under Professor R. H. Barback was asked to make
recommendations on setting up a stock exchange. As a result the Lagos
stock exchange was formed in 1960 and began operations the following
year. The first major step in the establishment of a money market was
also taken at this time when, in April 1960, the government made its
first issue of Treasury bills. The market was broadened when, from
1968 onwards, the Central Bank began issuing Treasury certificates of
one- and two-year maturities. As we have seen, the expatriate banks
strongly supported these moves, but the fact that the bulk of their
business had still not penetrated to meet the needs of the small- and
medium-sized native enterprises made the Nigerian government decide
to take further steps to 'command the strategic heights of the
economy'. In 1972, as part of its general indigenization programme, the
government took up 40 per cent of the equity of the Big Three
expatriate banks (Barclays DCO, Standard and United), and just four
years later increased its ownership, this time of all expatriate banks
along with other strategic expatriate industries, to 60 per cent. The
effect of the expansion of dealing in the stock market was dramatic.
The total annual value of transactions on the Lagos stock exchange rose
from 1.5 billion naira in 1961 to 18 billion in 1971. It then shot up to
over 92 billion in 1973, and to 180 billion naira in 1977.
Despite the successes achieved in setting up and developing the
appropriate instruments and policies for the central bank and for the
money and capital markets, the process of indigenization of
commercial banking, which is a vital element in development, had
fallen far short of reaching the degree of success anticipated by its
protagonists. Indeed, one of the most influential of these, Professor
Nwankwo, devoted a chapter of his book on The Nigerian Financial
System to what he roundly calls 'The Failure of the Indigenization of
Nigerian Commercial Banking'. Among his many recommendations
for improvement was his belief that the government 'should upgrade its
participation in the expatriate banks to 100 per cent and assume 100
per cent control and management of the banks' (1980, 86). By the mid-
1970s, however, opinion in general was moving away from such faith in
the power of government controls and being replaced by considerable
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THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
doubt as to whether the take-off into self-sustaining growth could be
guaranteed by seizing the commanding financial heights. A much more
pragmatic approach seemed to be more appropriate.
Stage 4: Market realism and financial deepening, 1973-1993
The Nigerian experience
Disillusionment over the painfully obvious lack of progress in the
development of indigenous commercial banking was part of a wider
pessimism concerning the growth of LDCs, which had confidently been
expected to have made much faster progress once they had achieved
political independence. The pessimism of the 1970s, symbolized by the
Rome 'doom' thesis on the 'limits to growth', extended into the 'lost
decade' of the 1980s. This pervading sense of failure was well
summarized by the then head of the Nigerian government, Lt.-Gen.
Obasanjo: 'We have got caught up in the conflict of cultures, of trying
to graft the so-called sophistication of European society to our African
society. We are betwixt and between' {Financial Times), 30 August
1978). It is, however, inherent in the nature of most LDCs that they are
'betwixt and between', for typically they are 'dual economies' with a
very substantial, if not the greater, part of their population existing in
rural poverty despite the considerable and sometimes spectacular
advances achieved in their more industrialized sectors situated mostly
in their rapidly growing urbanized and westernized areas. The
fashionable growth models copied from the West ignored this duality.
'The success of the Marshall Plan led many to believe that a similar
transfer of capital to developing countries would achieve similar results
. . . The early model of development therefore placed nearly total
emphasis on increasing physical capital to raise production',
particularly in industry. Agriculture was largely neglected' (World Bank
Development Report 1985, 97-8). Neither Keynesian-Rostovian
theories, imitative Marshall-type planning nor financial indigenization,
so long as these were based on western, mainly British, modes of
practice, seemed to work.
Growth had failed to 'trickle down' to the poor, nor had investment
in infrastructure and in industry 'spread out' to stimulate the dual
economy in general. For nearly two decades most of the sub-Saharan
countries had seen their per capita incomes actually fall, some
drastically. Even Nigeria, despite its oil, saw per capita income fall by an
average annual rate of 2.5 per cent from 1973 to 1985 (table 11.1), her
rising GNP cut down by an even faster-rising population. Nigeria's
THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
617
population, roughly estimated at 55 million in 1970, had already
doubled to 110 million by 1989 and was then expected to rise to 160
million by the year 2000 and to 302 million by 2025 (World
Development Report, 1990). The task of raising per capita income
therefore demands a most formidable effort in which the banking
system is being modified to play a more effective role than before.
Professor E. C. Edozien, economic adviser to the Nigerian president,
has placed on record his view that 'the banking system has played a
significantly less important role in promoting Nigeria's development'
than is suggested by 'its dominance of the financial sector' (1983, 110).
The banks needed to be dragged, kicking and screaming, into the rural
interior to provide the kinds of service in the imaginative forms required
to stimulate more rapid and more widespread development in the lower
section of the dual economy.
Turning first to the number and distribution of bank branches,
Professor Newlyn gave the total number of branches in West Africa in
1951 as being only fifty, of which twenty-nine were in Nigeria, almost
all being situated in the seaports (Sayers 1952, 437). By 1967 Nigeria's
eighteen commercial banks had sprouted 445 branches, a tenfold
increase. There was still a marked concentration in the large towns,
with Lagos State holding ninety-four branches, whereas four States had
on average only six branches each to cover the whole of their State; 70
per cent of the rural population had no access to banks (Ajayi and Ojo
1981, 22). Such continued rural paucity spurred the government in 1977
to embark vigorously on the 'rural banking initiative'. In the space of
the following five years the number of branches doubled to more than
950, of which over 270 were located in the formerly neglected rural
areas. Although this represents a bank density of only one branch on
average for 100,000 persons, compared with one branch for 2,300 in the
UK, it still marked a striking improvement by providing a bare
framework for a nationwide penetration by the banks. It took strong
pressure by the government and stern guidance by the Central Bank of
Nigeria to persuade the banks to take these steps into the interior. The
heavy costs of rural branches, which tend to rise with remoteness, were
also, perversely, felt more keenly by the newer and smaller indigenous
banks than by the larger, long-established former expatriate banks.
Even one of the Big Three, the United Bank for Africa, thought it
'pertinent to mention that all the rural branches opened so far are
incurring losses and the prospects of a majority of them ever becoming
profitable are very slim' (UBA annual report, 1981). In the view of the
authorities, rural development was worth being subsidized initially by
the profits of the banks' urban branches, while the viability of rural
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branches could be speeded up if appropriate practices were followed.
The Central Bank tried to educate the commercial bankers to get them
to lengthen the terms of their loans; to make moderately large loans to
rural co-operatives and other village groups for on-lending rather than
be faced with granting uneconomic, tiny loans to previously unbanked
individuals; to modify their rules regarding collateral away from
individual titles to land, insurance policies and such traditional items,
and to accept instead less conventional forms of security more
appropriate to rural communities, and so on. It has been the World
Bank's experience, in Africa and elsewhere, that 'costs can be reduced
when there are procedures especially tailored to facilitate lending to
small producers' ('Integrated rural development projects' Finance and
Development, March 1977, 18).
As well as pushing the commercial banks to modify their lending, the
authorities encouraged them to tap into what were believed to be the
considerable savings hidden away in local nooks and crannies such as
those kept by the traditional village co-operatives. The numerous, relatively
small and generally passive and fragmented pockets of savings, which in
any case were usually wastefully spent on conspicuous consumption,
could instead be channelled into productive investment. The integration
of these informal credit markets into the commercial banking system
was, however, a disappointingly slow process. The devastating civil war
of 1967-9 could carry only part of the blame for this. In the event, any
shortage of savings as a constraint on development seemed suddenly to
have been removed by the quadrupling of oil prices in 1973. By the end
of the 1970s Nigerian oil accounted for 98 per cent of its export
earnings and 80 per cent of the government's revenue. The oil boom was
not an unmixed blessing. Among its less welcome results were 'a drift
from rural to urban areas, neglect of agriculture and a gigantic appetite
for imported consumer goods to the detriment of local industries'
(Ojomo 1983, 235). The formal financial system was greatly stimulated
by the oil boom. All the same, in Professor Edozien's view, whereas 'the
growth and financial deepening of the banking system followed the
expected patterns' yet the 'rapid growth of the banking system' did not
have 'the corresponding impact on the economy normally associated
with such impressive growth elsewhere'. The financial deepening was
more apparent than real, a 'camouflage concealing a high degree of
under-development' (pp. 107-9). It should however be remembered that
Nigeria started from a very low base, with by far the lowest banking
density of all the twenty-five colonies analysed by Professor Newlyn in
1952. Before looking at other, more favourable examples of 'financial
deepening' the significance of the term itself needs further examination.
THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
619
Impact of the Shaw—McKinnon thesis
In 1973 two Stanford economists, Professors E. E. Shaw and R. I.
McKinnon, each published a book crystallizing their previous
researches, which together marked a turning-point in the economic
theorizing underlying the appropriate policies for faster and more
sustainable growth in the standards of living in LDCs. Although
differing in detail, their main concepts reinforce each other. Their
contribution may be — very baldly — summarized in the following six
points. First, they wished to alter the balance between government
planning and reliance on market forces in favour of the latter. In itself
there was little new in this, for a number of writers had for years been
questioning whether governments, in LDCs especially, were equipped to
carry their plans into practice. Among these critics none was more
consistent than Professor P. T. Bauer, who as early as 1958 had written:
'The adequate performance of these (planned) functions exceeds the
resources of all undeveloped countries ... we are faced with the
paradoxical situation that governments engage on ambitious tasks
when they are unable to fulfill even the elementary and necessary
functions of government '(quoted in World Development Report, 1991,
34).
Shaw-McKinnon, however, focused this general criticism on to
money, banking and finance, the one key sector where reform was seen
to be an essential feature without which all the other market-orientated
reforms would fail to reach their potential. Their second and vital
contribution therefore was to advance monetary factors to the centre of
the stage. 'The theme of this book,' says Professor Shaw 'is that the
financial sector of an economy does matter in economic development'
(p.3). Money was neither neutral nor passive in economic development
and furthermore relative prices mattered as signals for all economic
units and should not be obscured by rationing, subsidies and so on.
Thirdly, the 'shallow' and 'fragmented' financial systems of LDCs need
to be liberalized in order for price signalling to be effective.
'Liberalisation opens the way to superior allocations of savings by
widening and diversifying the financial markets', while the 'local capital
markets can be integrated into a common market' so that 'new
opportunities for pooling savings and specialising in investment are
created' (Shaw 1973, 10). Similarly McKinnon writes that 'the
unification of the capital market sharply increases rates of return to
domestic savers, widens investment opportunities' and 'is essential for
eliminating other forms of fragmentation' (1973, 9).
Fourthly, Shaw and McKinnon declare war on manipulated interest
rates. Because money pervades the economy (or should be made to do
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THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
so), liberalization of the price (s) of money was the most important
market freedom. The control of rates of interest such as low rates for
certain selected and highly privileged sectors, together with the
attempts to enforce severe anti-usury laws — both common practices in
LDCs - were especially pernicious in their effects, causing gross
misallocation of investment and holding back total savings to such a
degree as to raise rather than to reduce real rates of interest for the vast
majority of borrowers. Despite political independence, the old colonial
banking system has been generally replaced with very similar systems
which allow privileged borrowers the lion's share of available finance at
low real rates while depriving the vast majority of indigenous farmers
and industrialists of the finance they need. Professor McKinnon gives
examples from Ethiopia of moneylenders charging rates of interest of
from 100 to 200 per cent in the rural areas while in the urban areas
banks were charging importers 6 per cent and manufacturers 8 or 9 per
cent. This 'disparity between rates charged in urban enclaves and those
in rural areas - the latter containing 90% of the population - is
startling if not uncommon' (McKinnon 1973, 71).
Fifthly, although insisting that the liberalization of financial markets
is of central importance, Shaw and McKinnon believe that this should
be accompanied by more general liberalization. This process of
liberalization should not be in a slow series of steps, each one being
consolidated before the next, but rather should be a rapid advance on a
wide front. Although the context is different, the approach is similar to
the later acceptance of the 'Big Bang' method of reforming the City of
London in 1986 or the continuing debate in the 1990s of how best to
introduce the free-market systems into the centrally planned
economies. Sixthly and finally, the Shaw— McKinnon thesis gives
support to the 'trade not aid' and 'bootstrap' approaches to
development. The authors show that much (though not all) aid is
perverse in its results, being in unreformed LDCs subject to the same
distorting effects as other forms of finance, while tempting governments
to postpone essential, if painful, reforms. Lending by international
agencies at preferential rates to unreformed LDCs may similarly prop
up inefficient systems. Thus 'experience suggests that foreign funds may
be managed no more rationally than funds of domestic origin' and
'bear no relationship to the scarcity price of capital' (McKinnon 1973,
171). The truth of this fear was to be dramatically illustrated by the
problems of Third World debt, which will shortly be examined. Shaw
and McKinnon's thesis goes far to explain why LDCs must rely chiefly
on their own efforts if they are to raise their populations above abject
poverty.
THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
621
In view of the above authors' endorsement of free markets in general
and of their emphasis on financial markets in particular, their theories
appeared to combine the classical economics of free trade with certain
aspects of monetarism. Yet, as Shaw and McKinnon emphasize, neither
Keynesian nor monetarist policies can be applied uncritically to LDCs,
which typically have fragmented markets. Because the newly
independent economies had naively adopted Keynesian ideas as
essential parts of their planning, both Keynesianism and planning were
legitimate targets to be aimed at and, largely, destroyed, at least in their
generally accepted forms. It was not simply that Keynesian (and
monetarist) doctrine was irrelevant to LDCs; it was harmful. One
important area where the Shaw-McKinnon view was radically opposed
to that of Keynes was with regard to the latter's lenient attitude towards
laws against usury. On the evidence of history, Keynes had argued that
'it was inevitable that the rate of interest, unless it was curbed by every
instrument at the disposal of society, would rise too high to permit of
an adequate inducement to invest' (1936, 351). We have seen how
effectively Shaw and McKinnon exposed that commonly held fallacy.
The thrust of the Shaw— McKinnon thesis was therefore anti-Keynesian
leading to a rejection of the pernicious alliance between Keynesianism
and planning that had worked to the detriment of the development of
many LDCs in the period from about 1945 to the early 1980s.
The Shaw-McKinnon doctrines - perhaps attitudes would be a
better description - have spread with remarkable speed through the
usual channels of seminars, doctoral theses, articles and textbooks to
gain a considerable degree of acceptance by LDC governments
themselves and by the international agencies. Thus Barber B. Conable,
president of the World Bank, introducing the World Bank's
Development Report 1991, claims: 'This Report describes a market-
friendly approach. Experience shows that success in promoting
economic growth and poverty reduction is most likely when
governments complement markets; dramatic failures when they
conflict.' Similarly M. Camdessus, managing director of the IMF, has
welcomed the 'silent revolution' spreading through the LDCs, 'giving
greater scope to market forces and reducing the role of government'. In
answer to his own rhetorical question 'Why are more countries
adopting this approach?' he answered, 'Because it has worked and the
alternatives have not' (IMF Summary Proceedings 1989, 201). At the
same IMF meeting the Governor of the Bank of Malta spoke of 'a new
emphasis on market forces and private initiative ... a clear commitment
to reduce the role of the public sector . . . Policies which boost domestic
savings and encourage investment are being introduced together with
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THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
trade liberalisation' (p.189). The Shaw-McKinnon thesis, pragmatically
modified as necessary, was being widely put into practice.
Contrasts in financial deepening
The modern monetary and banking systems exported from Europe by
its bankers in order to finance the growing trade in palm oil, cocoa,
coffee, jute, tea, rubber, tin and so on were superimposed on a number
of vastly different indigenous financial foundations, ranging from the
predominantly primitive monetary economies of much of Africa and
the West Indies to the much more complex and long-established
financial practices of India, China and South-East Asia. The colonial
powers succeeded in imposing a considerable degree of uniformity in
the various countries with regard to currency systems and monetary
policies before independence allowed each of the new governments to
make its own choices. By that time the expatriate banks had established
themselves as by far the strongest and most reliable banks and formed
the pattern to be imitated by the indigenous banks. Similarly when the
new central banks were set up, the model mostly copied was the Bank
of England, whose officials usually helped in drawing up the new
banks' constitutions with some of the Bank of England's officials
generally being seconded to help during the formative years. There were
some exceptions - Ceylon imitated the United States' Federal Reserve
System, an equally if not more irrelevant model. The first phase of
financial indigenization after independence therefore remained neo-
colonial in essence and operational practice for twenty years or so.
The second phase of decolonization so far as financial developments
are concerned led to sustained attempts to integrate the fragmented
markets of the dual economies by extending the mainly urban modern
banks into the rural areas, and secondly to stimulate the growth of
money and capital markets together with appropriate credit
instruments, that is by 'deepening' the financial system. The two
methods overlap and complement each other and in practice have
reflected a mixture of 'planning' and 'liberalization' policies applied in
considerably different proportions in, for example, West Africa, India
and South-East Asia. We have already noted some of the problems
associated with the extension of bank branches in West Africa, and it
will be convenient to look very briefly at the progress made in trying to
establish effective money and capital markets in that area before turning
elsewhere. The first attempt at setting up a money market in West
Africa was that made in the Gold Coast in 1954, when the government
issued its first tranche of ninety-day Treasury bills. The whole of the
THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
623
issue was taken up by just a few purchasers, comprising mainly the
United Africa Co. plus two British banks. Later such issues in Ghana
and Nigeria were similarly purchased (and held) by a few large
expatriate firms and banks and by the Marketing Boards. The money
markets were dominated by government paper purchased, and mostly
held to maturity, by a handful of government agencies and expatriate
firms. A few large swallows do not make a money market.
Similarly, when the Lagos Stock Exchange first began operating in
1961 it dealt in only nineteen securities. Having extended to three other
branches the Nigerian Stock Exchange dealt in thirty-five securities in
1972. Thereafter the total number of securities grew more rapidly to
reach 168 in 1983, mainly because of the artificial boost given by the
company indigenization programme. By that year the number of
shareholders exceeded 700,000, and there were seven issuing houses,
seven merchant banks and twelve stockbroking firms doing business.
Even so, according to Mr A. O. Fadina, the head of the investment
department of the Nigerian stock exchange, 'the volume of trading on
equity has remained low due to the behaviour of Nigerians in holding
on to their securities, while speculation in securities is non-existent'
(1983, 197). In some ways the oil boom worked to depress the growth of
the money and capital markets, for by the end of the 1970s oil supplied
80 per cent of government revenue. The effect was to reduce, for most of
that decade, the need for the government to borrow, and so reduced
drastically the volume of Treasury bills, and federal and State loan stock
etc. on the markets. It is clear that institutional provision is a necessary
but insufficient condition for true financial deepening. Nevertheless
considering the initially 'empty' state of these markets, the Nigerians
should not be too self-deprecating about the degree of progress made in
developing their financial markets within a single generation.
The indigenous monetary scene in India was glaringly different from
that of the much more primitive picture which faced European traders
in much of Africa. Silver and copper coins had been in use in India for
1,000 years, while for hundreds of years special castes or family
communities of moneylenders had provided credit, collected deposits
and arranged trading deals through bills of exchange or 'hundi'. In
addition there had existed from time immemorial the resident village
moneylenders. A few examples taken from this mosaic of indigenous
financiers must suffice. The Multanis comprised a caste specializing
purely in banking, mostly in urban areas where they could be relied
upon to arrange quite large loans for their selected customers. They
neither speculated themselves nor did they lend funds for speculative
purposes. The Marwari were merchants as well as bankers; they
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THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
engaged in a wider variety of banking activities than did the Multanis.
The Marwari speculated themselves and frequently lent support to
what they considered to be justifiable speculation by their customers.
Like the Multanis, they were capable of providing large loans. In
contrast were the large numbers of different kinds of moneylenders who
concentrated on lending small sums to the poorer sections of society.
Prominent among such lenders were the itinerant Pathans who were to
be found throughout the Indian subcontinent in both the urban and
rural areas, providing sporadic competition to the local village
moneylender. The indigenous financial system was thus composed of
various kinds of moneylenders (i.e. those who lent mainly their own
money), and informal bankers (i.e. who lent mainly other people's
money), though, with so many categories, the distinction between them
was blurred. Some moneylenders supplemented their own funds by
borrowing elsewhere for on-lending like the banking intermediaries,
while the informal bankers were often well supplied with their own
surplus funds. The categories overlapped, and between them they
covered, in their informal and haphazard fashion, the whole range from
lending petty amounts to impoverished peasants to carrying on
business deals of a size and complexity not infrequently exceeding those
carried out by the formal banks.
The formal, joint-stock banks included British-based banks such as
Lloyds, Grindlays, the Chartered Bank of India, Australia and China,
together with those of mixed parentage. They grew up in the nineteenth
century to facilitate the trade in 'colonial' goods. In general, in their
formation and development they closely resembled those already
described for West Africa, and their story will not be repeated here. (A
fascinating account of the Chartered Bank is given by Sir Compton
Mackenzie in his Realms of Silver, 1954) . Among the significant
differences which do require examination are the three related matters
of the currency system, the establishment of central banking and the
integration of the long-established indigenous financial system into the
modern formal financial system as a vital part of government planning
to give India the best of both worlds - the indigenous and the modern,
westernized system. Unlike West Africa, India had no need to import
British coins, but it had a voracious and persistent appetite for silver
and gold from any quarter. There was a pressing need to finance the
growing trade with India and to maintain as much stability as possible
between sterling in all its forms (whether in coins, notes or bills of
exchange) and the rupee in all its many varieties. The most important
of the formal banks set up to supplement the internal money supply
were the three 'Presidential Banks' - the Bank of Bengal, established in
THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
625
1806, the Bank of Bombay (1840) and the Bank of Madras (1843). The
'Exchange Banks', such as the Oriental Bank (1842) and the Chartered
Bank (1843) looked after the business of financing external trade and
foreign exchange from which the Presidency banks were debarred by
their charters.
The fact that Indian currency was based entirely on silver, whereas
Britain, followed later by others, was on the gold standard, caused
recurring problems. Difficulties caused by the existence of twenty-five
varieties of indigenous issues of rupees were largely overcome when in
1835 the East India Company was given authority to issue its own
rupee, which came to be accepted as the standard throughout India and
beyond. At the same time the silver rupee was given legal tender status,
while any gold coins lost that privilege. With its currency thus based
firmly on silver (as was that of China and Japan and much of South-
East Asia) the vast increases in the supply of silver coming on to the
world markets from around 1870 onwards - as a result of plentiful new
mines and even more from the demonetization of silver as Germany,
Scandinavia and others went on to the gold standard - brought about
dramatic changes in India's terms of trade, inevitably reflected in the
fall in the value of the rupee. For forty years before 1873 the value of the
rupee had been maintained, with only very narrow fluctuations, at or
near to 2s. By 1893 it had fallen to Is. 3d. and, it was feared, was about
to fall to only Is. The authorities were forced to take action. Such a fall
in the value of the legal and undebased coinage of a large group of
countries comprising more than half the world's population was
without precedent - a neglected aspect of the costs of the international
gold standard and of the supremacy of sterling.
One of the Indian government's first actions was to set up the
Herschell Committee, on whose recommendations the government
suddenly closed the Indian mints to the free coinage of silver from June
1893. The resulting reduction in the circulation of rupees soon had the
intended effect of raising the exchange value to its target rate of IsAc/.
at which level it was to be stabilized. This rate was commercially and
administratively convenient, equating the anna with the penny and
making fifteen rupees exactly equivalent to the gold sovereign, thus
preparing the way for a fuller transfer to the 'ideal' of the gold
standard. The reduction in the circulation of rupees and the high rates
of interest required to sustain its higher exchange value led to
widespread complaints of trade being strangled. In a further attempt to
resolve matters another committee, this time under Sir Henry Fowler,
was appointed in 1898. It endorsed and strengthened the previous
commitment towards the gold standard, recommending a larger gold
626
THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
reserve to support the rupee, and renewed issues of gold sovereigns and
half-sovereigns, which were again given unlimited legal tender status.
The attempt to prop up India's limping bimetallism with the insertion
of these gold coins was a failure. In any case, too much attention was
being paid to mere coinage at a time when in India, as in the rest of the
world, notes and bank deposits were more vital ingredients of the
money supply. It was these wider financial matters which were at last
faced by the Royal Commission on Indian Currency and Finance set up
in 1912, chaired by Austin Chamberlain and enlivened by the brilliant
unorthodoxy of its youngest member, a Mr J. M. Keynes.
Keynes's view, presented briefly in a memorandum in the
Chamberlain Report (1913), were expounded more fully in his first
book, Indian Currency and Finance, published later that year. In it he
attacked the previous orthodox opinions of the Fowler Report and its
insistence on trying to force all the trappings of a full gold standard,
including gold coinage, on to the Indian economy. Keynes argued that
there was no need for an internal gold circulation and that the gold
saved from that purpose would be much better used to form part of a
much enlarged gold reserve for a possible state bank which would be
able not only to support the external value of the rupee but might well
take over the responsibility for the note issue and assume at least some
of the essential functions of a central bank. He pointed to the
deflationary dangers, to Europe as well as to India, which arose from
India's strong habits of acting as a 'sink of the precious metals' and of
hoarding a considerable proportion of the metals she attracted from the
rest of the world. The world should not leave 'the most intimate
adjustment of our economic organism at the mercy of a lucky
prospector, a new chemical process, or a change of ideas in Asia' (1913,
101). It was Indian hoarding that triggered Keynes's mind towards his
later discoveries of the fundamental macro-economic relationships
between savings and investment which culminated in his General
Theory. His Indian Currency and Finance paved the way for what
would later be recognized as the Gold Exchange Standard and also
started the series of steps by which India established its own central
bank. Keynes learned a lot from India; and the world learned a lot from
Keynes. Little wonder that independent India eagerly imbibed
Keynesian monetary and fiscal policies and combined them with an
idealized faith in its five-year plans probably to a greater extent than
any other LDC.
After the delays associated with the 1914-18 war, the
recommendations of the Chamberlain Report were in part put into
effect in 1921 when the three Presidency banks were amalgamated to
THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
627
form the Imperial Bank, a halfway house towards a central bank. The
Imperial Bank dominated the formal banking scene in the inter-war
period. It acted as the bankers' bank, it rediscounted bank and trade
bills, it kept other banks' cash reserves and clearing balances, and came
to their assistance in times of difficulty. It was not, however, allowed to
deal in foreign exchange or to issue notes. Note issue had been a
government monopoly ever since 1861. Thus, with only some of the
essential functions of a central bank having been granted, Indian
opinion clamoured for a proper central bank. As a result of yet further
examination, led by the Central Banking Enquiry Committee, which
reported in 1931, the Reserve Bank of India at last began its operations
in 1935. Naturally it was modelled on the Bank of England.
After independence in 1947, the banking system was remodelled to
fit its Indian environment. In 1948 the Reserve Bank was nationalized, a
clear signal that banking was to be directed towards the objectives laid
down by the government. The Reserve Bank was largely responsible for
the establishment in 1948 of the Industrial Finance Corporation to
provide medium- and long-term finance to industrialists unable to get
such funds from normal banking services. The corporation was
therefore intended to fill India's enormous 'Macmillan gap'. In 1952 the
Reserve Bank made considerable improvements to the structure and
operation of its formal money markets by creating a bill market in
which the larger banks were actively engaged. In 1955 the Imperial
Bank was at last re-formed as the State Bank of India; its few remaining
central banking functions were taken over by the Reserve Bank, leaving
it to concentrate on its commercial business, but with its duty to
promote an active branching policy re-emphasized. The monetary
authorities also encouraged mergers and amalgamation among the
smaller banks in order to strengthen the banking system (for the
smaller banks had a higher failure rate). Thus the number of 'reporting
banks', which stood at 517 in 1952, fell rapidly to 154 by 1964 and then
more slowly to reach its low point of ninety in 1967. In 1969 the
fourteen largest private banks were nationalized, a process later
extended to other private Indian banks, but not to the foreign banks.
One perverse result of the government's attempts to 'socialize' and
control the rural moneylenders is instructive. Annual licensing, formal
written contracts, maximum interest rates and so on had the effect of
driving the moneylenders underground. There resulted such a shortage
of credit in many villages that agricultural output fell. Desperate
villagers were either denied credit altogether or had to pay even higher
rates to compensate the moneylenders for the higher risks associated
with their 'illegal' activities. The authorities reacted to this situation by
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THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
trying hard to fill the rural vacuum by stimulating the growth of co-
operatives and by a sustained drive to extend commercial bank
branches into the villages. The number of banking offices rose from
1,951 in 1939 to 4,819 in 1947, and to 8,262 in 1969. Thereafter the pace
hotted up to reach 30,202 in 1979 and 42,016 in 1983 (Nwankwo 1980,
47; J. S. G. Wilson 1986, 145). Thus, despite the rapid increase in
population, banking density has been improved to a remarkable extent,
e.g. from 1:65,000 in 1969 to 1:16,000 in 1983. A laissez-faire policy
would not have brought about such an impressive degree of rural
penetration. Much has therefore been done to extend and integrate the
formal and informal financial systems within India's dual economy.
The efficacy of these and similar measures is however held back by a
number of considerable weaknesses, including the key factor of
illiteracy, which in 1985 was still 57 per cent for male adults and 75 per
cent for female adults. With per capita income of only $340 in 1988,
India seemed fixed among the poorest group of countries, yet its
neighbour, Bangladesh had a per capita income of only half that low
figure. In an attempt to raise its growth rate, India from the late 1980s
embarked on more liberal policies, no doubt influenced by the
startlingly more successful results achieved in South Korea, Taiwan and
in the two city-states of Singapore and Hong Kong, to which latter two
examples we now turn.
The colonial territories to the east and south-east of India used a
motley of different moneys; they shared their formal banking business
among the British, Dutch and Indian banks, while their considerable
informal banking was carried out by financial middlemen, such as the
Indian Chettiars, and by a growing number of small indigenous local
banks which arose to meet mainly the needs of their particular ethnic
groups. The main links between the informal market and the more
formal were supplied by the Chettiars. In the Malayan peninsula a
varied mixture of media of accounts and means of payment provided
the 'exchange' banks with ample justification for their generic title.
During most of the nineteenth century the official currency in British
Malaya was Indian, i.e. the government of the Straits Settlement kept its
accounts in rupees and annas, although the general public kept their
accounts and made most of their payments in dollars and cents,
including their taxes. In this region, where the traders of East and West
converged, the repeated official attempts to gain uniformity by insisting
on the rule of the rupee were long doomed to failure. The public's
revealed preferences were recognized when in 1867 dollars coined by the
Hong Kong mint together with the highly favoured Mexican dollar and
those of Bolivia and Peru were officially accepted as legal tender. In
THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
629
1874 the same privilege was extended to the Japanese yen and the US
dollar. Subsequently most of the former British colonies have retained
the dollar designation, although until the late 1960s they were linked
with sterling rather than the US dollar. With floating currencies
internationally widespread from the 1970s these regions have all
adopted managed floating to suit their own circumstances. In retrospect
'it seems fantastic that great British centres of commerce like Singapore
and Hong Kong should have depended on foreign coinage' for so long,
wrote Sir Compton Mackenzie, who goes on to explain that from 1894
a British dollar was at last specially minted for use in the East, being
minted chiefly in Bombay (Mackenzie 1954, 114). In 1902 a Straits
Settlement dollar was introduced, and in 1904 the Mexican and other
dollars were demonetized, greatly simplifying transactions in com-
munities which were still highly cash-conscious.
In much the same way there was no uniformity in paper money either.
Official government notes were not issued in most of this region until the
middle of the twentieth century, and had not by 1994 arrived in Hong
Kong. During most of these two centuries the areas relied on the licensed
privileges granted to just a few of the large commercial banks. The first of
these note-issuing banks to operate in Singapore and Malaysia was the
London-registered Mercantile Bank, which had spread south from its
Indian base in 1856. Its issues were soon overtaken by those of the
Chartered Bank, which saw the total circulation of its notes issued by its
Singapore branch rise to over $300,000 in 1872 and then almost treble to
$874,000 by 1880, faithfully reflecting the rise in trade and the growth of
the banking habit. In the absence of either a central bank or of a Currency
Board, these exchange banks filled the gap by profitably providing a
reliable currency in the form of their own banknotes for a period of from
eighty to a hundred years. In Hong Kong, the Hong Kong and Shanghai
Bank has acted continuously since its formation in the colony in 1865 as
the main bank of issue. In the 1980s it was still responsible for around 80
per cent of the Crown Colony's note circulation, the other 20 per cent
being supplied by the notes of the Chartered Bank.3
Although these exchange banks were originally established in the
East to finance the local trading houses which dealt in tea, coffee,
rubber, tin and so on, they soon diversified and in time spread far
beyond their eastern bases, reaching back to absorb other banks in the
Middle East, Europe and America, and developed a network of
international branches. It is a tribute to the strength of their eastern
bases that they were able to re-export their financial services in this way.
Already by the end of the nineteenth century the HKSB had established
3 A decade later, as an exceptional example of reverse financial colonialism, the Hong
Kong bank absorbed UK's Midland Bank.
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THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
branches in London, New York, San Francisco, Hamburg and Lyons. Its
expansionary ambitions became especially aggressive in the second half
of the twentieth century. In 1959 it acquired two London-registered
banks, the Mercantile Bank (of India) and the British Bank of the
Middle East. In 1965 it took a majority holding in its local Hang Seng
Bank. In 1980 it obtained full control over the London merchant bank,
Antony Gibbs, and also acquired a 51 per cent stake in Marine Midland
Bank of New York. In 1982, it was, however, thwarted in its bid for the
Royal Bank of Scotland, that country's largest bank, after investigation
by the Monopolies Commission and adverse comments by the Bank of
England for not heeding its advice (Report of the Monopolies and
Mergers Commission, January 1982). By 1990 the Hong Kong Banking
Group was ranked the thirtieth largest in the world; it had over 1,300
branches, of which 433 were in the USA, 409 in Hong Kong, 124 in
Cyprus, 43 in Malaya, 39 in Saudi Arabia, 29 in the UK and 25 in
Singapore. In 1992 it took a controlling interest in Britain's Midland
Bank - a sort of reverse colonialism. As we have previously noted, the
Chartered Bank followed a similar course. After its amalgamation with
the Standard Bank, the enlarged bank successfully took over the Hodge
group to provide itself with a regional spread of branches within
Britain. In 1990 it had grown to achieve ninth place in the UK and a
world ranking of 127th. As an indication of the vigour of the
commercial banks of the two city-states, Singapore with a population
of 2.6 million had five banks in the world's top thousand; Hong Kong
with a population of 5.7 million had nine such banks; India with a
population of 815.6 million had just eight, while Nigeria had none (The
Banker, July 1991). A similar success story is seen in other aspects of
financial deepening in these territories.
The increase in the number, size and range of activities of the
commercial banks in Singapore and Hong Kong has been supplemented
by the rise of other financial institutions and the development of their
money and capital markets. The encouragement given to indigenous
enterprises has not been at the expense of foreign financial institutions
for both countries, heavily dependent as they are on international trade,
have adopted liberal, open-door policies. Thus in Hong Kong, seventy-
nine of its 113 licensed banks were foreign, while of its total of 283
deposit-taking companies, some 150 were either subsidiaries of foreign
companies or were joint ventures with Hong Kong partners. Professors
Lee and Jao, in their authoritative account of Financial Structures and
Monetary Policies in South-East Asia consider that 'on this count Hong
Kong is probably next only to London and New York in having the largest
number of foreign banking and near-banking institutions' (1982, 9).
THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
631
Similarly in Singapore twenty-four of its thirty-seven fully licensed banks
are foreign, with their assets comprising 73 per cent of the total.
Singapore's merchant banks grew from only two in 1970 to thirty-seven in
1980, most of them being joint ventures. The largest banking institutions
in both countries, blessed with their international network of branches,
have not only been active participants in the Euro-dollar market but have
also strongly supported the development of an active Asian dollar market
and an, as yet modest, Asian bond market. Hong Kong has the largest
stock market in South-East Asia with a wide dispersion of ownership of
shares among most income groups and with a large international
clientele. With regard to financial securities, the rapid growth of this
sector in Hong Kong may be illustrated by the growth in the number of
professional dealers, advisers and representatives - from less than a
hundred in 1967 to 2,204 in 1979.
Both countries have thus followed liberal, market-driven policies —
but with significant exceptions seen for instance in Singapore's official
discouragement of low-wage 'screw-driver' factories and its insistence
on high-wage, high value-added products requiring skilled labour. Just
two illustrations of financial 'dirigisme' may be given. The first
concerns the Development Bank of Singapore which was set up in 1968
to provide long-term finance for industry and to serve generally as an
instrument of government policy as a channel to support the
government's chosen priority sectors. The DBS has collaborated closely
with British, US and Japanese financial institutions in supporting a
number of important industrial projects and in the development of the
capital market by its own equity involvement and by acting as an issuing
house for the shares and debentures of other companies. It similarly
assisted the growth of the money market by helping to establish the
National Discount Company in 1972. It has thus acted on a significant
scale in a threefold capacity as a commercial bank, a development bank
and a merchant bank. The second example concerns the Post Office
Savings Bank, which in 1971 was separated from the Post Office of
Singapore. Whereas the old colonial POSB, like its British parent, had
to invest only in government securities and paid out only low and mean
rates of interest, the new POSB gave tax-free interest and invested the
resulting increased funds in priority projects such as public transport,
shipping and aviation, including Changi Airport. As a result of this
change of policy the number of POSB branches rose from forty-four in
1971 to ninety-eight in 1979 while the total of savings deposits increased
by an astonishing twenty-eight times (S. Y. Lee, in Skully 1982, 63-4).
Naturally this angered the other banks and led to a few modifications;
yet it forms a brilliantly successful contrast to the overcautious and
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THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
stodgy policies in connection with Britain's NSB and Giro as described
earlier.
Liberal markets and financial deepening have worked together to
provide an essential part of the foundation on which the successful
growth of the two city-states has been built. Although it is much easier
to raise the standard of living of small regions than of vast, highly
populated countries like India or Nigeria, yet even when every
allowance is made for such factors, the marked differences in the
relative degrees of free markets and in their progress in financial
deepening combine to tell a convincing story. Part of the difference for
these contrasts lies in the extent to which Nigeria and India, together
with a depressing number of other LDCs, have become increasingly
indebted to their overseas creditors.
Third World debt and development: evolution of the crisis
Adam Smith, foreshadowing Rostow by three centuries, emphasized the
crucial role of capital in development as follows:
Every increase or diminution of capital tends to increase or diminish the
real quantity of industry, the number of productive hands, and
consequently the exchangeable value of the annual produce of the land and
labour of the country, the real wealth and revenue of all its inhabitants.
Smith also succinctly encapsulated the later prolix preaching of the IMF
and World Bank when he went on to warn that 'Capitals are increased
by parsimony, and diminished by prodigality and misconduct' ( Wealth
of Nations, Book II, 'On the Accumulation of Capital' 301). However,
for capital investment to take place at all, someone, somewhere has to
save, a habit which the rich individual or nation finds much easier to
foster than the poor, resulting in relatively and absolutely greater
savings and investment potential in the richer countries. There is no
doubt that the total psychic cost of saving is reduced by the transference
of savings from the richer to the poorer countries - but this situation, if
a true loan and not a gift, can continue only so long as the benefits from
the proceeds of the resulting investment in the poor country exceed the
repayment costs. Otherwise the savings of the poor are transferred to
the rich, or the debt is repudiated, cutting off further supplies, a
situation which has arisen not infrequently in practice in the past and
underlines the world debt crisis of the last two decades of the twentieth
century.
To the extent that freedom of money and capital markets exist, then
savings tend to flow to the regions containing those sectors promising
THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
633
the highest net returns — those, in the Keynesian jargon, where the
marginal efficiency of capital is greatest. In practice, political risks and
incentives are added to economic uncertainty so as to interrupt and
divert the flows of capital. All the same, there would seem to be a
natural bias for investment funds to flow between and towards (rather
than away from) the already industrialized countries with their well-
established money and capital markets, where research and
development activities breed new products and reduce costs, and where
political structures provide more stable environments for investment
than are generally found in LDCs. Thus over the long period the terms
of trade tend to favour the rich countries, although there are frequent
deviations from this trend strong enough and long enough to give
particular groups of LDCs short- to medium-term advantages.
Furthermore the degree of superiority in the productive powers of the
rich countries over those of the poor is not the same in every sector.
Thus profitable investment opportunities can arise in LDCs for their
export trades in addition to their natural advantages in their domestic
economies. However, while it is true that the workings of the law of
comparative costs may provide opportunities for exportable goods
lucrative enough to repay indebtedness, there can be no reasonable
guarantee as to the broadness or duration of such opportunities. In the
indefinite long run, the poorest LDCs are always trailing further
behind the rich countries.
The long-run advantages in the terms of trade enjoyed by the richer
countries are especially noticeable with regard to their greater
bargaining power in the setting of international rates of interest and in
determining debt repayment terms. The borrower and the creditor are
rarely equal partners: as the proverb more crudely puts it, beggars can't
be choosers. Keynes, in a section of his Treatise dealing with 'Methods
of Regulating the Rate of Foreign Lending' showed how 'during the
latter half of the nineteenth century the influence of London on credit
conditions throughout the world was so predominant that the Bank of
England could almost have claimed to be the conductor of the
international orchestra' (1930, 306-7). The baton was passed to the
USA in the 1930s while after 1945 a larger group of industrial powers
including Germany and Japan, together with the IMF and the World
Bank, have been the main determinants of international rates of
interest. In such matters the LDCs may try to persuade (sometimes with
success) but they cannot be decisive. Little wonder then that difficulties
regarding LDC debt repayment have been endemic, though by and large
manageable. Special circumstances since the mid-1970s magnified these
634 THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
Table 11.3 Burdens of the twenty most indebted LDCs in 1988 compared with
1970.
Debt service
Total debt
Debt as % GNP
as % exports
Kank
1QQQ iP,-.
ly/u
1Q99
1 QQQ
ly66
orazii
i
i
lUlOJD
1Z.Z
1Q £
91 ft
Zl.o
A9 n
Mexico
z
OODDJ
1 9
lo.Z
SI A
A3 C
4J.J
India
5
jllOO
1 2 Q
1 Q 3
1". J
12 7
9A Q
Argentina
A
AQ CAA
93 fi
JO.D
^1 7
J 1./
90.U
Indonesia
c
J
JV.V
ol. /
1 3 Q
3Q £
J7.0
Egypt
b
4.9 Zj 7
99 ^
ZZ. J
1 9£ 7
lO.O
3Q n
Poland
-7
/
OODDl
n.a
^1 1
J 1. 1
n.a
1U.U
China
Q
O
n.a
O./
n.a
Turkey
Q
y
Jlj07
1 J .u
4£ 1
T-O. 1
ll £
3A 9
J J .z
Venezuela
1U
3ft9Q£
9UZ70
/ .J
aq n
A 1
3Q 7
Nigeria
11
4.3
102.5
7.1
25.7
S. Korea
12
27376
22.3
16.2
20.4
11.5
Philippines
13
24467
21.8
62.6
23.0
27.7
Algeria
14
23229
19.8
46.6
4.0
77.0
Yugoslavia
15
19341
15.0
38.9
19.7
17.6
Greece
16
18797
12.7
35.9
14.7
32.1
Morocco
17
18767
18.6
89.8
9.2
25.1
Malaysia
18
18441
10.8
56.3
4.5
22.3
Thailand
19
16905
10.2
29.7
14.0
15.7
Chile
20
16121
32.1
79.3
24.5
19.1
Total debt 20 LDCs = $719,800 million = 74 per cent total debt of all 89 LDCs
in WDR.
difficulties into a world debt crisis of unprecedented degree and which
seemed of almost unmanageable proportions.
Most LDC external trade is naturally with the rich, industrialized
countries, so that the unprecedented strength and persistence of
economic growth in the industrialized countries from 1950 into the
early 1970s, despite minor setbacks, enabled the LDCs to borrow
readily and to repay without insuperable difficulty. The amount of such
borrowing increased substantially throughout the 1960s and into the
1970s without arousing international concern. Already by 1970, as is
shown in table 11.3, a number of countries had built up very
considerable amounts of long-term debt: e.g. Indonesia's debt was
equal to 30 per cent of its GNP, Argentina's debt-servicing requirements
took 51.7 per cent of the value of its exports, while Mexico's debt
servicing was equivalent to 44.3 per cent of its export earnings. Such
THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
635
Table 11.4 LDCs where external debt exceeded GNP in 1988.
Debt as
Rank % GNP
Rank
Debt as
% GNP
Mozambique
Congo
Yemen
Mauretania
Madagascar
Somalia
Laos*
1
2
3
4
5
6
7
399.7
205.0
199.4
196.2
192.7
185.2
153.5
Tanzania
Cote d'lvoire
Jamaica
Egypt
Zaire
Zambia
Nigeria
Mali
8
9
10
11
12
13
14
15
149.7
135.1
127.2
126.7
118.0
116.7
102.5
100.8
* Laos also had by far the highest debt service as % of exports (143.5).
Source. World Development Report, 1990, 222-3.
debts continued to grow without engendering any sense of impending
doom until more than ten years later. It was not until August 1982,
when Mexico failed to meet its contractual interest repayments, that the
world debt crisis emerged into prominence to pose a danger to the
development prospects of a number of LDCs during the remainder of
the twentieth century.
The causes of the crisis were laid in the 1970s. The quadrupling of oil
prices in October 1973 helped drastically to reduce the normal increase
in the volume of world trade in general. The annual growth of world
trade, which had been at the buoyant rate of 9 per cent between 1965
and 1973 fell to 4 per cent between 1973 and 1977. Higher oil prices
transferred incomes, which would have been spent, to OPEC countries,
whose powers of absorption were low and whose savings were high, a
large proportion being kept as bank deposits in the western world. As a
result there was downward pressure on world output and on
international interest rates, which in real terms turned negative for
several years. The scenario for a massive 'recycling' of petro-dollars via
the banking system was thus laid in place, so that, after an initial
hiccup, LDC borrowing was raised to an even higher level. Bank
presidents travelled the world peddling their loans at bargain prices,
with those of the larger American banks leading the way. By 1975 some
38 per cent of commercial bank lending (including short-term) to LDCs
was by banks from the USA, with even many of the relatively small
regional banks prominent in lending to their oil-producing neighbour,
Mexico (Amex Bank Review January 1985).
The nature of much of the new borrowing, with relatively more
coming from the commercial banks and less from governments and the
636
THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
international agencies such as the World Bank, made the LDCs much
more vulnerable than previously. Compared with official sources, more
commercial bank lending was at variable rather than at fixed rates and
for shorter terms. When the industrialized world felt constrained to
turn to monetarist policies to cure inflation, its imports (including those
from LDCs) fell, rates of interest rose substantially, and aid
programmes to LDCs were reduced to half or less of the 0.7 per cent of
GNP, which had been accepted as a target by the UN in 1970. The
monetarist fervour of the North cost the South dearly. The initially very
attractive low or negative real interest rates had allowed the LDCs to
embark on ambitious projects with low returns, including many that
showed little or no potential for securing export earnings. Debts
mounted and medium-term loans had to be renewed at higher rates,
while export earnings to repay such debts failed to rise correspondingly.
The swing from euphoria to panic, when it eventually came, was
remarkably swift and all the more severe from having been delayed so
long. The monetary pendulum applies to long-term and medium- as
well as to short-term credit.
The second oil price shock, which led to a doubling of oil prices
between 1978 and 1980, again helped to raise international interest
rates and, combined with other causes, pushed the industrial countries
into a deep recession, although the higher oil prices at first benefited
some of the major debtors, such as the oil-producing countries like
Mexico, Nigeria and Venezuela, thus postponing their day of
reckoning. The first, but unheeded warning of imminent crisis came
from an unexpected quarter when, in late 1980, Poland declared itself
unable to meet its debt obligations. A mutually acceptable rescheduling
programme was quickly agreed among the creditors. Poland's
difficulties did, however, react on her neighbours in eastern Europe as
western bankers, previously eager to lend, rapidly withdrew their funds.
These two aspects of the Polish crisis - the 'regionalization syndrome'
and the rapid reversal of bank funds - were soon to show themselves on
a much vaster scale, but because the Polish situation was believed to be
the unique result of its particular political disturbances, its warning
signs were ignored by the world debt markets. It was the Mexican
debacle in August 1982 which led to a sudden and worldwide
recognition of the unstable and untenable state of LDC indebtedness.
The Mexican crisis was triggered by a massive flight of capital to the
USA in the late summer of 1982. The US government came immediately
to Mexico's aid by making an advance payment of $1 billion for future
oil receipts, while the New York Federal Bank together with the IMF
and the Bank for International Settlements quickly arranged a package
THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
637
of bridging loans and credits of about $5 billion. The Mexican crisis
immediately produced a 'regionalization syndrome' in Latin America,
with flights of capital from heavy borrowers such as Argentina, Brazil
and Venezuela. The effects quickly spread to reduce the borrowing
powers of LDCs elsewhere, so that by the spring of 1983 some twenty-
five LDCs with debts comprising two-thirds of the LDC total had been
forced to enter rescheduling negotiations with their bankers, while
many of them were completely cut off from new banking funds. 'It is
not easy to escape the conclusion,' said the Bank for International
Settlements, 'that international borrowing since 1974 has not been very
advantageous to the debtor countries, although a good part of it was an
inevitable product of two major rounds of oil price increases' (BIS
Annual Report, 1983, 130). The lending bankers found their balance
sheets under strains of unaccustomed severity, but sauve qui peut
attitudes would only make things worse for other bankers as well as for
the borrowers. Consequently in the ten years following the Mexican
crisis a whole series of co-operative ventures were arranged, involving
the debtor governments, the international agencies (IMF and World
Bank etc.) plus the governments of the industrial countries and the
lending bankers. Because of the prominence of American interests, the
lead in such negotiations was first given by the US Treasury Secretary,
James Baker, in October 1985, followed up by a modified and improved
version by his successor, Nicholas Brady, in March 1989. While the
details of these various initiatives differ, they offered combinations of
debt forgiveness, debt lengthening, interest-free interludes, equity
swaps, sales of discounted debt on secondary markets and so on. Of
vital importance have been the structural adjustment programmes
designed with the help of teams of experts from and engaged by the
IMF and World Bank and tailored to the special requirements of each
co-operating debtor - an essential factor in improving the debtor's
prospects and one which the commercial bankers on their own would
be quite unable to accomplish.
An indication of the size of the problem which still remained in the
mid-1990s is given in tables 11.3 and 11.4. In terms of absolute size,
LDC indebtedness is concentrated in a group of about twenty
countries, with Latin America being prominently represented. In 1988
three-quarters of the total debt of all the eighty-nine LDCs listed in the
World Bank's debt statistics was owed by the twenty countries shown,
with Brazil and Mexico still the leading debtors and with 40 per cent of
the debt of this most indebted group incurred by Latin American
countries. In the 1980s the net flow of real resources has been away from
most of these countries to the creditor countries. Debts and credits are
638
THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
born together as non-identical twins; hence debtors and creditors must
share the blame for the 'lost decade' of the 1980s, but not necessarily in
equal proportions. In this connection it might be appropriate to reflect
on some of the views given by the financial leaders of heavily indebted
LDCs at the annual meeting of the IMF and World Bank held in
Washington in September 1990. The representative of India, the Third
World's third largest borrower, stated: 'Our mandate must be to ensure
the transfer of real resources to developing countries: we seem to be
accomplishing quite the opposite' (IMF Summary Proceedings, 1990,
89). The Brazilian delegate, speaking on behalf of a group of twenty-
three countries, mostly Latin American, was more specific:
The debt problem is one of the most significant factors explaining the
economic stagnation of the 1980s. Since the beginning of the debt crisis
Latin America has transferred roughly $250 billion to creditor countries
whereas it has received only $50 billion in financial resources. The figures
are eloquent enough: the region exported resources in amounts several
times greater than those in the Marshall Plan. (Proceedings, 1990, 93-4)
If the debt burden is measured not in absolute size but as a
percentage of GNP then the plight of the very poorest countries is made
plain, as is the near-impossibility of their being able on their own to
repay their debts on the originally contracted terms. Table 11.4 shows
that, of the fifteen countries whose external debt is greater than their
national income, twelve are in Africa, including Congo with a ratio of
debt to GNP of 205 per cent and the extreme case of Mozambique,
whose debt is four times its national income. At the IMF meeting
already mentioned the chairman of the Board of Governors, speaking
on developments in sub-Saharan Africa, stressed the dangers of
borrowing not only money but the package of ideas which came with
them: 'We cannot afford to borrow foreign ideologies and models for
our own development' (Proceedings, 1990, 80).
The 1990s opened with a new challenge to the South, sharply
perceived by Governor Sumalin of Indonesia, the fifth most indebted
LDC: 'Restructuring Eastern Europe is likely to require heavy infusions
of capital, creating a new and sizeable claim on international financial
resources that will compete with both the investment needs of the
industrial countries and the development and debt alleviation needs of
the developing countries' (Proceedings, 1990, 36). This argument, while
having some short-run validity, smacks too much of the 'fixed sum of
capital' fallacy or the false assumption of a zero-sum game, forgetting
the long run, in which Keynes's ideas are not all dead. As part of the
swing of the pendulum, Keynes is no longer king; but his insight into
THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
639
the relationship between saving and investment taught us that saving is
not a fixed sum determining investment - but rather that investment (if
efficient, as we have now learned), enlarges the global income so as to
provide the higher savings required. Governor Sumalin also made a
point, which would have been deeply appreciated by the prodigal son's
elder brother, that heavily indebted but performing countries should
not be forgotten. Prominent among such performers was his own, oil-
producing country and non-oil-producing South Korea. Korea's debt
was in 1988 about the same size as Nigeria's but represented far less of a
burden in that Korea's debt was only a sixth of its GNP, while oil-
producing Nigeria's was fully as large as its GNP. Korea and the other
NICs of Taiwan, Singapore and Hong Kong have provided powerful
examples to the remaining LDCs, showing that borrowing can be a
springboard rather than a millstone.
A further hopeful feature for the Third World is the growing
universal awareness in the last decade of the twentieth century of
environmental issues, of which the IMF/World Bank's Global Financial
Facility is but a starting point. While the Third World must not be made
a dumping ground for northern pollution, there can be plenty of room
for acceptable trade-offs in return for debt reduction and in 'swap for
nature' deals of a thousand and one kinds - given only the vision.
Where there is no vision the people perish.
Conclusion: reanchoring the runaway currencies
People who cannot look after their own money are unlikely to make a
good job of managing other people's money, and so with countries.
Inefficient investment of externally borrowed funds is more likely to
occur where the domestic economy is highly inflationary, so that price
signals cannot perform their allocative functions properly. Unfortu-
nately, many of the highly indebted countries suffer chronic inflation to
an almost incredible degree. During the 1980s the average annual rate of
inflation for the severely indebted countries exceeded 100 per cent,
compared with just under 5 per cent for the high-income economies.
Table 11.5 indicates the severity of the inflationary disease among the
poorer countries.
All but one of these twenty countries come from low or middle-
income economies. The exception, Israel, relies to an extraordinary
degree on indexing prices and incomes to the US dollar. Such devices
are palliatives rather than cures. As Professor Patinkin of the University
of Jerusalem emphasizes, the Israeli experience shows that 'an economy
640
THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
Table 11.5 The twenty most inflationary countries, 1980-1988.*
Rank
Annual average
% price rise
Annual average
Rank % price rise
Bolivia
Argentina
Brazil
Israel
Peru
Uganda
Nicaragua
Mexico
Yugoslavia
Uruguay
1
2
3
4
5
6
7
8
9
10
488.8
290.5
188.7
136.6
119.1
100.7
86.6
73.8
66.9
57.0
Zaire
Ghana
Turkey
Somalia
Mozambique
Sudan
Zambia
Ecuador
Poland
Costa Rica
11
12
13
14
15
16
16
18
19
20
56.1
46.1
39.3
38.4
33.6
33.5
33.5
31.2
30.5
26.9
'Tor inflation in the 1990s see pp. 667-72 below.
Source: World Development Report, 1990, 178-9.
whose money supply is indexed will generate a frictionless inflationary
process which will accordingly continue indefinitely at indeterminate
rates' (Patinkin 1993, 26). Seven of the leading ten inflationary
countries come from heavily indebted Latin America. Bolivia leads this
inglorious list with average annual inflation rates of around 500 per
cent for the 1980s with Argentina averaging around 300 per cent and
Brazil nearly 200 per cent. These averages mask the destructive power of
inflation during its extreme ranges. Of all LDCs inflation appears to
have become most endemic in Latin America, the extent and continued
extreme severity of which is further illustrated in table 11.6. Peru's
spectacular rate of 7,482 per cent fell in the three years 1990-2 to 'only'
73.5 per cent; similarly Brazil's from 3,118 per cent to 'only' 982 per
cent. In view of such experience the progress made in reducing inflation
between 1990 and 2000 is all the more remarkable.
Some LDCs have, however, managed remarkably well in controlling
inflation. India, though partly through rigid price controls, quotas and
directives, has held down its inflation rate to an annual fairly
respectable average of 7.5 per cent for twenty-five years. The true test is
to be seen as it frees its markets. Indonesia reduced its average annual
inflation rate from 34.2 per cent in 1965-80 to 8.5 per cent from 1980-8.
Korea, another 'performing' debt repayer, similarly reduced its rates
during that period from 18.7 per cent to 5.0 per cent. Inflation is not
ineradicable even for LDCs.
THIRD WORLD MONEY AND DEBT IN THE TWENTIETH CENTURY
641
Table 11.6 Latin America's inflationary record, 1984-1992.
Consumer prices % rises
1984-9
1990 1991
1992
average
Argentina
444.5
391.5
20.5
77.3
371.5
30.5
2314.0
3118.0
26.0
26.7
7482.0
40.8
171.1
428.0
21.8
22.7
409.5
34.2
25.0
982.0
15.5
15.5
73.5
31.5
Brazil
Chile
Mexico
Peru
Venezuela
Source. BIS 63rd Annual Report, June 1993, p.55.
For a hundred years up to about 1950 colonialism provided currencies
of good quality and sound banks though constraining internal monetary
growth and diverting development excessively into exports. Fifty years
of subsequent independence has led to the other extreme of hyper-
inflation which also strongly distorts development. Admittedly inflation
during the second half of the twentieth century has been worldwide but
with an enormous difference of degree between most advanced
countries and most of the LDCs. Efficient spending, saving and
investment decisions require reductions in inflation globally but most of
all in the Third World and in the former command economies of the ex-
communist countries. If the LDCs, in an effort to swing the secular
monetary pendulum away from its inflationary extreme, were to anchor
their currencies firmly once again to one or other of the northern
currency blocs - the US dollar, the Japanese Yen, or one of the strong
European currencies, it would be an act, not of neo-colonialism, but of
plain commonsense, soundly based on the hard-learned lessons of their
own experience. Reanchoring their runaway currencies is a prerequisite
for development to reach its true, more equitable, long-run potential.
The remarkable success and the limitations of such a policy, which led
to a dramatic fall in Latin American inflation by the year 2000, is
analysed further in the section sub-titled 'The End of Inflation?' in
Chapter 13, below.
12
Global Money in Historical
Perspective
Long-term swings in the quality/ quantity pendulum
From early times when money first began to be used for a variety of
purposes up to around the second half of the seventeenth century some
form of physical commodity supplied either the only or the main form
of money. In general, therefore, during that very long earlier period the
limits within which money could become relatively scarce or plentiful
were closer than have subsequently been the case. Even so, quite wide
swings did occur from time to time in the relative quantities and
velocities of circulation of money despite communities being reliant
solely or mainly on commodity moneys. To some degree the
alternations between inflationary and deflationary pressures are as old
as money itself, although it is only after the development of modern
forms of fiat money and of banking that the speed and extent of such
fluctuations were able to increase without apparent limit. Modern
fluctuations in the value of money are therefore simply differences of
degree, not of kind, from those occurring in earlier periods, because
money itself has a built-in pendulum to which extraneous forces
ceaselessly add their own powerful pressures. Money is not an inert
object, but a creature responsive to society's demands.
Our distant forebears yielded to temptation and returned chastized
from their more modest backslidings to yield valuable lessons to
modern generations, for money is among the most long-rooted of
human institutions. Among the key characteristics which have given
money its uniquely desirable qualities is scarcity relative to the demands
made upon it for spending and saving (including conspicuous
consumption and ornamentation). Such scarcity arose either from the
GLOBAL MONEY IN HISTORICAL PERSPECTIVE
643
difficulties of growing crops or rearing animals, catching fish, dredging,
quarrying, digging mines and so on to provide supplies of the preferred
type of money - or from the exercise of monopoly power by the main
source or arbiter of the thing used as money. All these brakes on the
money supply, whether natural or state-imposed, slipped from time to
time. We have seen that where a state has a monopoly over money, it is
extremely likely that, when pressed, it will seek salvation by such
devices as printing more money, or in former times, by debasing the
coinage, a process commonly carried to such an extreme that money
became valueless, and a new scarce money of high quality had to be
reintroduced. Such processes were invariably accompanied by and
reinforced first by increases and then by decreases in the velocity of
circulation. From the many examples already given just a few are
reproduced here in this summary chapter to illustrate such pendular
swings.
Examples are given in chapter 2 of the five-hundredfold depreciation
in the value of the cowrie shell in Uganda following the wholesale
importation of such shells in the mid-nineteenth century, and of a
similar though not quite so drastic fall in the value of wampum in the
USA following the introduction of mechanized drilling and factory
assembly of wampum in New Jersey in 1760. We also noted in our
study of primitive money that many communities used a number of
commodities as money at the same time, thus providing an insurance
when one of these types dropped in value. A positive and long-sustained
increase in both the quantity and quality of money accompanied by
similarly sustained increases in trade and mercenary military activity
followed the invention of coinage in Lydia and the growth of mints
around the eastern Mediterranean. The Greek city-states vied to
produce the finest coins, with Greek bankers becoming the civilized
world's most experienced money-changers. A further enormous
stimulus to trade was later provided when Alexander the Great
monetized the previously stagnant, huge gold stocks of the Persian
empire, much of which gold was added to the silver stocks of the Greek
bankers, so bringing down the gold-silver ratio from over 13:1 to a
round and convenient 10:1. As was suggested in chapter 3, the London
goldsmith-bankers would readily have recognized the Greek bankers as
their close relatives; both were aware of the working of Gresham's Law
in practice, and of the fundamentals of the bullionist theory of value.
For the ancient world's greatest example, by far, of excessive inflation
we have to remind ourselves of the great debasement of the Roman
coinage in the second half of the third century AD. By AD 270 the silver
content of the denarius had fallen to 4 per cent, from 50 per cent twenty
644
GLOBAL MONEY IN HISTORICAL PERSPECTIVE
years earlier. By the end of the century the prices of the main goods
were over fifty times higher than during the first century AD. This
runaway inflation caused Diocletian to issue his famous Edict of Prices
of 301, to institute a thorough reform of the currency and to support
these measures by a strong fiscal policy in the shape of the world's first
annual budget. Rome produced rubbishy metallic flakes for the
impecunious together with gold coins for the rich. Roman experience
clearly demonstrated excessive swings from monetary scarcity to
monetary oversupply and also the possibility of carrying on
simultaneously with a two-tier monetary system - just as we today have
relatively good currencies in most of the rich countries and bad
currencies in most of the poor countries. Similarly, just as economists
differ about the causes and cures of present inflationary and other
ailments, so the ancient world still provides an exciting academic
battleground for modernist, Marxist and primitivist historians (see
Garnsey, Hopkins and Whittaker, 1983).
After the fall of Rome Britain showed the unique spectacle of being
the only former Roman province to withdraw completely from minting
money, and even refrained from using coined money for nearly 200
years. The velocity of money fell quickly after AD 410, as is indicated by
the increase in the number of hoards found in the following few
decades. Velocity, even including 'foreign' coins, probably fell to zero
within a generation. In Britain the Dark Ages were particularly sombre
so far as money was concerned (Grierson and Blackburn 1986, 4). The
absence of money reflected and intensified the breakdown of civilized
living and trading. When foreign gold coins did return to Britain from
the Continent they were initially held to be too valuable for common
currency and so were used mainly as ornament. Trade and velocity of
monetary circulation increased together, recreating a demand for
indigenous mints in Britain, so that by about the year 1000 some thirty
mints were producing millions of silver pennies for trade and tribute in
the form of Danegeld. The reminting of the coinage provided some of
the early English kings with a rich source of income and a convenient
alternative to taxes, a process which led to a more or less regular cycle
of complete recoinage every few years, inevitably producing alternate
shortages and surpluses of money. The value of medieval money in
Europe depended crucially on securing a sufficient supply of bullion,
whether from its own mines (in the case of silver) or from Africa (in the
case of gold), especially when gold coins began increasingly to
supplement its previously monometallic silver coinages.
The commercial revolution of the long thirteenth century (from
around 1160 to 1330) was stimulated by increased supplies of both
GLOBAL MONEY IN HISTORICAL PERSPECTIVE
645
silver and gold, enabling the creation of multi-denominational
currencies, comprising gold coins for very large payments with silver
and copper (mostly silver) being used for the medium and small
transactions which made up the vast majority of payments. A much
more economically significant increase in the money supplies from this
time onwards came from the development of banking and the use of
bills of exchange, spreading from the leading centre of Lombardy to
France, Spain, the Low Countries and then to London. The Black Death
of the mid-fourteenth century illustrated the rare case where, although
the absolute money stock in general remained unchanged, its relative
supply was greatly increased. Even so, the inflationary effects, though
patchily present, were compensated to a considerable degree by a
drastic decline in the velocity of circulation.
The plentiful supplies of money in the long thirteenth century gave
way to recurring bullion famines in the later Middle Ages, e.g. in the
first decade of the fifteenth century, even more severely from 1440 to
1460, and again in the first half of the sixteenth century. To overcome
such shortages monarchs resorted to debasement, especially on the
Continent, while the Tudors also made use of other devices such as the
dissolution of the monasteries, with the Church's silver plate adding to
the proceeds of the sale of monastic lands. Such devices were rendered
less necessary by the influx of precious metals into Europe from the
Americas, and by the simultaneous rise in the acceptance and
circulation of banknotes. Printed money supplemented minted money,
moderately at first when linked together through the principle and
practice of 'convertibility', but later without limit when governments
found it expedient to abandon convertibility despite the inflation which
inevitably followed, and which in turn could be cured only by relinking
paper money to gold or silver or some combination of both. Numerous
examples of such alternations, under modern conditions, of monetary
excesses and reforms have been detailed in the previous chapters, with
the extremes of astronomical price increases followed by complete
monetary breakdowns occurring more frequently and becoming more
geographically widespread since the 1920s than ever before. Warnings
of the repeated tendency of the quality of money to deteriorate through
excess supplies exceed the span of recorded history, from the fable of
the Midas touch down to the annual reports of almost every central
bank in the last two decades of the twentieth century. It should be
abundantly clear that the need to understand and to control money is
consequently also greater today than ever before.
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GLOBAL MONEY IN HISTORICAL PERSPECTIVE
The military and developmental money-ratchets
Although it has been possible to achieve long periods of reasonably
stable prices in times of peace, wars have almost always brought with
them rising prices, for two main reasons: first, government
expenditures grow during wars, while productive factors are diverted
into non-productive channels and, secondly, the government's normal
powers to borrow and to create money are greatly stimulated by the
imperatives of war. Even when, in post-war periods, resources return
to productive uses, the inflated money supplies tend to remain in
existence to form a new, higher base on which the economy operates.
The military ratchet was the most important single influence in raising
prices and in reducing the value of money in the past 1,000 years, and
for most of that time debasement was the most common, but not the
only, way of strengthening the 'sinews of war'. Supplementing the
periodic bouts of official debasement were the more continuous
practices of counterfeiting, clipping and forgery carried out on a
considerable scale to supplement the official money supply, despite
being subject to the harshest punishment, including the death penalty.
However morally reprehensible, such practices when widespread
pointed to the demand for money exceeding the supply, leading to
attempts by the more entrepreneurial elements to overcome the
constraints of a money supply wherever the incentives were
sufficiently profitable. Bad money did not always drive all good
money out of use but usually supplemented rather than supplanted
good money, the latter being kept selectively for high-priority
purposes, e.g. for export or for the payment of taxes. Gresham's Law
at first worked to increase both the quantity and velocity of
circulation, but if carried to extremes went into reverse, as coins
became of such poor quality that they were no longer readily
accepted, while holders of good coin would no longer part with them.
Thus the various forms of official and unofficial debasement were
accompanied by hoarding and dishoarding and so widened the swing
of the monetary pendulum.
Given the ultimate disadvantages which inevitably followed the
initial beneficial results of debasement, it is easy to see that in the long
run increased supplies of specie obtained through trade or new mines,
though of uncertain or accidental occurrence, were the best way of
removing constraints on the growth of the economy. Long-run trends
in depression and prosperity correlate extremely well with the specie
famines and surpluses of the Middle Ages, as has been clearly
demonstrated in the incomparable survey of money during this period
GLOBAL MONEY IN HISTORICAL PERSPECTIVE
647
made by Dr Spufford. Furthermore it was to the most prosperous
areas of Europe, e.g. the towns of north Italy, that the increased
supplies of gold and silver were in the main attracted, so encouraging
the growth of new forms of money such as bank deposits, public debt
instruments, bills of exchange and cheques. These paper additions to
commodity money eventually widened the swing of the money
pendulum to greater extremes than would otherwise have been the
case. During this period the pound sterling gained considerable
prestige by being less frequently and less drastically debased than
most continental currencies. In this connection, however, we should
remind ourselves of the point emphasized in chapter 4, that the
countries which experienced the greatest economic growth were also
those which had indulged in the most severe debasement. A 'sound
money' such as sterling was in part purchased at the cost of crucifying
the economy on the silver-cross penny or its later equivalents.
When modern paper money released prices from their metallic
anchors, the military inflation ratchet began to be seen at its most
powerful. The first extensive use of state paper issues (outside China)
occurred in America, whose colonial governments, in a reaction to the
extreme scarcity of sterling imposed by the British home government,
began issuing their own notes. The 'Continentals' of the new USA fell
in value by the end of the Revolutionary War to one-thousandth of
their nominal value, a process repeated by the Confederate paper
which similarly became worthless by the end of the Civil War. The
assignats of the French Revolution and the hyper-inflation of the
German mark between 1918 and 1924 are simply among the best-
known of hundreds of examples of war-induced inflation.
Second only to war as an engine of inflation is the general
acceptance of the need for an ever-expanding supply of money in
order to facilitate economic development, a belief which in a weaker
and vaguer form long preceded the Keynesian revolution, though it
was the Keynesian ratchet which acted as a strong causative factor in
the unusually high peacetime inflations of the second half of the
twentieth century. The seventeenth-century writers on Political
Arithmetic waxed lyrical on the positive powers of money to create
national wealth. Sir William Petty, for instance, was convinced that,
properly set up, a new public bank could 'drive the Trade of the whole
Commercial World' (see chapter 6). John Law, the Keynes of the early
eighteenth century, published a Proposal for Supplying the Nation
with Money virtually anticipating the 'multiplier', and which when
first put into effect in France producing beneficial results before
leading on to the fiasco of the Mississippi Bubble. This failure pushed
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GLOBAL MONEY IN HISTORICAL PERSPECTIVE
French opinion back to the other extreme of opposing for more than a
century the kind of banking system the country needed - another
example of extremes in one direction leading to equally if not more
damaging extremes in the other direction. France provides one of the
best examples in history of belated industrial development being to a
large extent caused by delay in adopting a modern banking system.
It would therefore be difficult to quarrel with the conclusion
reached by Professor Rondo Cameron in his study of Banking in the
Early Stages of Industrialisation that 'both theoretical reasoning and
the historical evidence suggest that the banking system can play a
positive "growth-inducing" role' (1967, 291). That was the attitude of
the appropriately named 'Banking School' of the mid-nineteenth
century in opposition to the 'Currency School', which latter
emphasized the need to maintain the quality of money by restricting
banking through tying note issue strictly to variations in the amount
of gold. Similar polarization of views had been put forward by the
anti-bullionists and the bullionists in the previous generation. Given
the pendular motion of actual money supplies over time, it is no
surprise to discover that most writers on money fall into one or other
of these variants of the expansionist or the restrictionist schools. It
was the special circumstances of the 1930s which gave rise to Keynes's
so-called General Theory. Writing in the depth of the depression in
1933, Keynes pointed out that 'the first necessity is that bank credit
should be cheap and abundant', but he also advocated the urgent need
for 'large-scale government loan-expenditure'. 'Hitherto war has been
the only object of governmental loan-expenditure on a large scale
which governments have considered respectable' (1933, 20-2). Thus
was the Keynesian ratchet invented. Later it was eagerly applied
worldwide, especially by the newly independent nations of the post-
colonial regions. However much the Keynesian revolution may be
condemned for its long-run consequences of high and stubborn
inflation, Keynes's enormous successes in providing cheap finance for
the Second World War and in being largely responsible for the
inestimable benefits of full employment for the first post-war
generation, i.e. for its short- and medium-term benefits, should not be
forgotten. Given its long-run drawbacks, the pendulum inevitably
swung away from Keynesian expansionism back to a re-emphasis of
laissez-faire, to monetarist restrictions on the money supply in
particular and against government intervention and 'planning' in
general. The slump of 1991-3 began to push the pendulum back away
from monetarism towards new variants of Keynesianism.
GLOBAL MONEY IN HISTORICAL PERSPECTIVE
649
Free trade in money in a global cashless society?
Technical improvements in media of exchange have been made for more
than a millennium. Mostly they have been of a minor nature, but
exceptionally there have been two major changes, the first at the end of
the Middle Ages when the printing of paper money began to
supplement the minting of coins, and the second in our own time when
electronic money transfer was invented. ('Electronic funds transfer' is
only one of a number of major improvements in communications which
include the development of lasers, the use of satellites and so on, and is
used here simply as a shorthand reference to the whole range of such
inventions relevant to banking and finance.) Such major economies in
the production of the monetary media have considerable macro-
economic effects. The first stimulated the rise of banking, while the
second is opening the way towards universal and instantaneous money
transfer in the global village of the twenty-first century. It is hard to
improve on Adam Smith's description of the revolution caused by the
introduction of paper money — an invention more readily adopted in his
own country than in the rest of Great Britain. 'The substitution of
paper in the room of gold and silver money replaces a very expensive
instrument of commerce with one much less costly, and sometimes
equally convenient. Circulation comes to be carried on by a new wheel,
which it costs less both to erect and to maintain than the old one' (1776,
Book II, 257).
One of the most significant but insufficiently noted results of these
two major kinds of invention is the fundamental reduction they bring
about in the degree of governmental monopoly power over money.
When coins were the dominant form of money, monarchs were jealous
of their sovereign power over their royal mints. Paper money allowed
banks to become increasingly competitive sources of money, a
development which led not only to significant macro-economic changes
but also facilitated contemporary revolutionary constitutional changes
(as outlined in chapter 6). It was no accident that the Whigs, who
supported the limited constitutional monarchy of William and Mary,
were prominent in promoting the Bank of England. Similarly in the era
of electronic banking 'national' moneys are becoming increasingly
anachronistic as millions of customers, irrespective of their country of
domicile, are eagerly offered a variety of demand and savings accounts
by a multitude of competing financial institutions in a variety of
competing currencies. They are spoiled for choice - and national money
monopolies are thereby also being 'spoiled', in the sense of being
reduced in effectiveness. The monetary authorities always try to
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GLOBAL MONEY IN HISTORICAL PERSPECTIVE
reassert their monopolistic power — in economic jargon, to make sure
that money is exogenously created - as opposed to money supplies
produced elsewhere by the working of market forces - or
'endogeneously' as the economists describe the process. Just as the
effective working of the international gold standard at the beginning of
the twentieth century was dependent on the activities of the Bank of
England, so the evolving European Monetary System in the last decade
of this century has been dependent on the discipline imposed by the
German Bundesbank, which was readily accepted by a German
population that has remained painfully aware of the hyper-inflations it
suffered after each of the two world wars. Twice bitten, thrice shy.
It was not until the UK experienced a frightening annual inflation
rate of 27 per cent in the mid-1970s, when the trade unions rather than
the Governor of the Bank of England were the real controllers of the
money supply, that the Keynesian ratchet was thrown away and
replaced by the monetarist policies that had long and consistently been
proposed by Milton Friedman. He saw government restriction of the
money supply as being by far the most important if not quite the only
method of controlling inflation. However, another lifelong opponent of
Keynesianism, Friedrich Hayek (1899-1992), proposed a strikingly
different solution, based less on the power of government and more on
the strength of the market led by consumer choice over the kinds of
money to be used, with consumer sovereignty rather than government
monopoly being the best guarantor of the value of money. It was in the
UK's inflationary peak year of 1976 that Hayek published his two
Hobart Papers of Choice in Currency and the Denationalisation of
Money, updated in his book on Economic Freedom (1991). He lived to
see the reversal of Keynesianism and the almost global triumph of the
market over Marxism which he had prophesied. He advocated a Free
Money Movement similar to the Free Trade Movement of the
nineteenth century with 'the prompt removal of all the legal obstacles
which have for two thousand years blocked the way for an evolution
which is bound to throw up beneficial results which we cannot now
foresee' (Hayek 1991, 220). Unfortunately the unforeseeability detracted
from the acceptability of this part of his proposals. Wider credibility
was given to his proposal to allow people to trade in dollars, pounds,
marks etc., in the High Street but rather less to his suggestion that they
should also have the right to claim their wages and so on in the currency
of their preference. Echoes of this idea resurfaced in the British
government's proposal of the 'hard Ecu' to compete with the other EC
currencies. Retail choice of currency would replicate what had long
been possible at the wholesale level in the foreign exchange markets.
GLOBAL MONEY IN HISTORICAL PERSPECTIVE
651
This choice could include the use of gold coins, though Hayek was
forced (reluctantly) to acknowledge that a return to the gold standard
was impractical, since the very attempt to do so would cause huge and
destabilizing fluctuations in the price of gold. Before returning to the
implications of Hayek's concepts for the future of multinational
currencies it is convenient here to consider briefly to what extent
payments, in whatever currency, might come to be made in cashless
form.
With regard to the technology of money transfer there is probably
much truth in the paradox that the peaks of the longer-term future are
easier to perceive than the misty low ground which comes within the
compass of our more immediate vision. There is general agreement with
regard to the long-term development of versatile, economic and
ubiquitous money transfer systems, so that payment and credit facilities
operated by the individual at home through video terminal or
telephone, by the executive at the office or by the customer at the shop,
all linked directly to a central computer, will at some future date be
virtually on tap, enabling immediate validation and payment within
agreed limits for practically everyone in western society, and probably
also to the richer persons in the urban areas of the less developed
countries. Disagreement arises as to exactly when this picture of a
universal, direct credit-and-debit system will largely replace rather than
merely supplement existing cash and paper transfer systems: it merely
requires the extension of practices already in existence at the wholesale
level downwards into the retail trade and greater co-ordination across
regional currency systems similar to that anticipated by Hayek. A
comparison with the history of development of the steamship is relevant
here in that the threat of steam brought about such a remarkable
improvement in the quality of sailing ships that this apparently obsolete
mode of transport was extended for considerably longer than had
seemed at all probable. This 'sailing-ship effect' is very much in evidence
in the present paper transfer systems supplemented by electronic devices
- improvements which have postponed the advent of the impatiently
awaited cashless society to a rather more distant future than was
anticipated only a few years ago. Cash, when compared with other
forms of payment, still has many virtues, including that of anonymity,
obligatory for the poor and yet also much appreciated by the rich
criminal (as was demonstrated in the frauds that helped to bring about
the failure of the Bank of Credit and Commerce International in 1991).
Thus although cash will continue its present trend in becoming
relatively less and less important in the industrialized world (despite
some nostalgic attempts to revive a few prestigious gold and silver
652
GLOBAL MONEY IN HISTORICAL PERSPECTIVE
coins), it will remain of considerable importance for the greater part of
the world's population. Real choice in currency, as in means of payment,
is an option possible only in affluent societies, where traditional
boundaries between currencies, banks and other financial institutions
are dissolving. Hitler was a little premature in saying that there were no
longer any islands: the smart card and the satellite have made most
geographical boundaries obsolete insofar as the movement of money is
concerned. Even multinational action by the monetary authorities can
fail to control this flood on those occasions when the global, instantly
mobilized army of speculators decides to strike.
Independent multi-state central banking
It might at first sight seem that the reference to Hitler is irrelevant. It
certainly is not. It was his legacy of war and inflation which gave rise
not only to the Schuman Coal and Steel Community so as to make
future European wars much less likely, but also to the historic decision
to grant the German central bank an unusually high degree of
independence. The Schuman Plan led on to the Common Market, and
from the beginning of 1993 to the Single Market. This in turn leads on
in plain and painful logic to the concept of a Single Currency. In the
same line of argument (as shown in chapter 8) Keynes's post-war
policies would not have been adopted had he not demonstrated in How
to Pay for the War his novel method of financing the most expensive
war in history at rates of interest lower than ever before. His ideas were
taken to extremes in the two decades following the Radcliffe Report,
according to which money did not matter very much, and so economic
discipline in Britain was drowned in a sea of liquidity. Thus the new-
forged Keynesian inflation ratchet took over in peacetime from the
age-old military ratchet. The slow, tide-like convergence in European
inflation rates since discarding Keynesianism has been reflected in the
attempts to narrow their exchange rates on the planned path towards
irrevocably fixed rates of exchange, which by definition means a single
currency.
A draft treaty on European Union was signed, with varying degrees
of reluctance and euphoria, by EC heads of state in Maastricht in
February 1992 in which the proposals for Economic and Monetary
Union (EMU) were of special significance, outlining in confident detail
the path towards a system of independent multi-state central banking
for controlling monetary policy throughout the EC. By the end of 1993,
after much political turmoil, the treaty had in general been accepted by
the member states, though with opt-outs for Britain, Denmark and
GLOBAL MONEY IN HISTORICAL PERSPECTIVE
653
Sweden. In the mean time the speculative storms of September 1992 and
July 1993 practically destroyed the Exchange Rate Mechanism and so
greatly strengthened the hands of the opponents of the treaty that some
considerable delay in implementing the original programme seemed
inevitable. Nevertheless the inner core of Germany, Benelux, France and
Italy pressed ahead with a modified plan. However, when the
fundamentals of the treaty were eventually put into practice, then early
in the twenty-first century a European Central Bank became fully
operational, which together with the central banks of the participating
member countries comprise the European System of Central Banks
(ESCB). In a radical departure from the traditions of a number of EC
countries, ESCB was guaranteed political independence.
Despite the opposition of those who, with some justice, decry such
developments as being irreversible surrenders of national sovereignty to
unelected and therefore democratically unaccountable bureaucrats,
there was sufficient momentum already built up to carry at least twelve
member countries towards the 'convergence' required to progress
eventually through the various stages on to the climax of the final stage
when a single currency, at first called the Ecu (symbolically combining a
medieval French currency with the reality of the modern German
mark), was to become the sole legal tender of the participants.1 After
all, for hundreds of years in the Middle Ages, an abstract, fictitious unit
of account, the ecu de marc, was used in foreign exchange to
circumvent the much more numerous national and regional boundaries
of that period (Einzig, 1970, 71). Thus the future, in fact though not
now in name, as is especially typical of monetary history, will be
repeating the half-forgotten experiences of the distant past.
Neither Britain's proposal of a thirteenth currency, the 'hard Ecu', nor
Hayek's free choice in currencies stand much practical chance of
widespread adoption. The maintenance of multiple currencies would
deprive EMU of one of its main advantages, namely the removal of
exchange costs. According to a European Commission report entitled
One Market, One Money, a single currency would remove transaction
and exchange costs worth up to 1 per cent of GDP annually for the
smaller state and around 0.5 per cent for the larger states. There would
also be a saving of around Ecu 160 billion in the EC's foreign currency
reserves. Such savings would not simply be of a once-for-all nature but
would, dynamically, allow a higher sustainable rate of growth to be
achieved (European Commission, Luxemburg, October 1990) - a
consideration meriting close study by those who ask 'What price
1 See p. 674, where 'Euro' not 'Ecu' became the new name for the single currency, with
effect from December 1995.
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GLOBAL MONEY IN HISTORICAL PERSPECTIVE
sovereignty?' In any case, single sovereignty facing a financially and
economically integrated Europe differs greatly from what existed pre-
viously. Either way, positively through entry or negatively through
refusal, some sacrifice in traditional financial sovereignty is inevitable
except, in the latter case, the sovereign right to inflate, a dubious benefit.
The worldwide swing of opinion and policy in favour of removing
inflation at almost any cost has exhibited common features which have
been enthusiastically adopted by a range of monetary authorities of
differing political colours such as New Zealand, Australia, Chile and
Canada, and have been incorporated into the EC's financial
programmes. These include the setting of specific targets for inflation,
the strengthening of the legal independence of the central banks, and
the imposition of ceilings on government deficits. Spendthrift
governments are to be pilloried. The annual report of the Bank of
Canada may be taken as a typical example of the new fashion of setting
out a published profile for the reduction of inflation over the medium
term, not simply in a wishful vague declaration but in specific figures.
In February 1991 the Bank of Canada and the Government jointly
announced targets for reducing inflation. The specific targets are to reduce
the year-over-year rate of increase in the consumer price index to 3 per cent
by the end of 1992; 2Vi per cent by the middle of 1994; 2 per cent by the end
of 1995. Thereafter the objective would be further reductions until price
stability was achieved. (Ottawa, 28 February 1992)
In October 1992 the UK similarly adopted an inflation target, of 1 per
cent to 4 per cent, with the Bank of England given the task of publishing
each quarter its own independent assessment of progress amended to
2Vi per cent in 1997.
Because of the inherent imperfections of almost all retail price
indexes (e.g. in not being able to make allowance for the stream of new
goods that feature heavily in modern consumer expenditures and in not
allowing sufficiently for the increased quality of the 'same' goods) a
nominal inflation of about 2 per cent is held by many authorities to be
roughly equivalent to stable real prices. Attempts to go below that
might well bring disproportionately greater costs. Thereafter
competitive disinflation might have similar effects to the 'exporting' of
unemployment by the competitive devaluations of the 1930s, or at least
might depress the growth of world trade below its trend potential,
causing a substantial and irrecoverable loss. On the other hand, unless
the authorities are seen to make a really strong case for price 'stability'
their loss of credibility might make its attainment impossible. It is in
this connection that the case has arisen not only for the greater
GLOBAL MONEY IN HISTORICAL PERSPECTIVE
655
independence of central banks but also for giving to central banks the
overriding priority for the achievement and maintenance of price
stability. To give central banks a number of objectives which experience
has shown to be incompatible leads to impotence where it really
matters - the value of money (Roll, 1993).
Thus the ESCB is explicitly committed to the primary objective of
price stability, and while it has to support the general economic policy
of the Community, this must be only to the extent that it does not
conflict with its primary objective. Its political independence is
strengthened by a number of practical measures such as guaranteeing
adequate finance for its operations, stipulating long-term appointments
for its board (for eight years) and so on. The bank will not be allowed to
make loans to public bodies, thus denying governments their easiest
access to finance and blocking off a traditional road to inflation. The
ESCB's statutory advisory duties regarding member countries' economic
policies, such as the exchange rates with non-EC countries and fiscal
policies - particularly the size of balance of payments or budgetary deficits
— will reflect its primary commitment to monetary stability. ESCB has
anti-inflation built into its constitution, an essential safeguard against
the power of vested interests to push governments into excessive expend-
iture. For two generations inflation has been an almost permanent,
though disguised and arbitrary, tax on the consumer. ESCB represents
the consumers' response, a modern version of the revolting American
colonists' cry of 'no taxation without representation', a democracy of
the money box which is less inflationary than the ballot box.
Conclusion: 'Money is coined liberty'
The omens look promising for an era of much lower inflation in the
richer countries from the mid 1990s. The Economist boldly sees zero
inflation rather than merely low inflation as a distinct possibility for
OECD countries which, having suffered high unemployment and low
growth in the early 1990s in order to bring down the rate of inflation,
would not wish this sacrifice to have been in vain (22 February 1992).
The lesson has been learned worldwide, though at great cost, that it is
countries with low inflation that have achieved high growth and there-
fore low unemployment. Thus, as detailed in chapter 11, the LDCs have
learned the virtues of 'financial deepening', which could be obtained
only through turning from Keynesian-type government planning towards
allowing instead much greater freedom for market forces in general and
financial liberation in particular. Even in the leading industrial countries
inflation had appeared to be unstoppable for the whole of a long sixty-
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GLOBAL MONEY IN HISTORICAL PERSPECTIVE
year period since 1933, during which the cumulative effect on the level
of retail prices has been enormous, equivalent to 4,000 per cent in the
UK and 950 per cent in the USA: others were far worse.
Attention has been drawn in earlier chapters to the paradox that in
Britain and the USA inflation increased after the change in the mid
1970s from Keynesian to monetarist policies. This was for two reasons.
First, the introduction of monetarism coincided with and complemented
extensive financial deregulation. Secondly, and more importantly,
inflation had become so embedded in Anglo-American society that its
potential momentum, which had been suppressed by the planning
controls associated with Keynesianism, was suddenly released. The
frustrated inflationary horse had been given its head: it took a long time
to bring its gallop to an end.
It has taken two generations for the truth finally to be fully accepted
by the general public and by the political decision makers - first, that
the apparent short-term benefits of inflation are outweighed by its long-
term costs; secondly, that inescapably one of the keys to a successful
economy is control of the money supply in its changing forms; and,
thirdly, that this can be achieved only by limiting national governments'
sovereignty through setting up independent central banking systems. In
time the patient optimism of Lord Robbins, one of the few British
economists to oppose Keynesianism when it was in full flood, has been
justified: 'It really should not be beyond the wit of man to maintain
control over the effective supply of money; and, as I conceive matters,
eventually little less than the future of free societies may very well
depend on our doing so' (Robbins 1971, 119). Thus it would appear
that in the long run Keynesianism has been killed.
However, if the concept of the long-term pendulum is correct, then
the monetarists' claims regarding the death of Keynesianism are
exaggerated, for, as has been repeatedly demonstrated by past
experience, theories and practices favouring financial restraint tend in
the course of time to give way to precisely the opposite. This comes
about in part because of social amnesia, in part because constraints, if
long imposed, become increasingly irksome, unfair and patchy in
coverage as privileged or ingenious persons find ways around the
constraints and invent acceptable money-substitutes. Perhaps the
strongest force undermining monetary restrictions in the long term is
the common complaint of output forgone, as shown in the various
versions of countries being 'crucified on a cross of gold', or 'held to
ransom by money monopolists' or being 'made bankrupt by high
interest rates' and so on. Opinion begins to turn again in favour of less
restrictive - and eventually, of clearly expansive - monetary policies.
GLOBAL MONEY IN HISTORICAL PERSPECTIVE
657
Furthermore when prices have remained relatively stable for some years,
so that inflationary expectations have evaporated, then Keynesian-type
policies really can work again, provided that they are believed to be
genuinely short- to medium-term in duration and/or restricted to
particular regions, or for clearly exceptional purposes.
German reunification provides a powerful example of how a country
which has had an excellent long-run post-1950 record (compared with
most others) in controlling inflation, has consequently been able to put
Keynesian-type policies to work with good effect, deliberately seeking
unbalanced budgets and running down its customarily large balance of
payments surplus into a significant deficit, as a result of making huge
financial transfers from West to East Germany, which in 1992 were, at
DM 180 billion, equivalent to 6.5 per cent of West Germany's GNP (see
'Massive support for the new Lander' in Deutsche Bundesbank
Monthly Report, March 1992, 15 ff.). The conversion rate for the
merging of the marks, as explained in chapter 10, was certainly not
chosen by the free market, nor, despite its blustering, by the
Bundesbank, but was most definitely a political decision boldly taken
by Chancellor Kohl. The balance of benefit to Germany was clear,
despite some increase in inflation and in interest rates which turned out
to be acceptably moderate in Germany, but unfortunately extremely
awkward for the rest of the EC, forcing their rates up at a time of rising
unemployment, when naturally they would have wished to reduce
them. Policy synchronization in a multi-state system poses considerable
difficulty for the future ESCB. In the case of countries such as Britain
and the USA which had not been able to control inflation, Keynesian
policies worked perversely, making matters much worse and so
contributed to a considerable degree to a debilitating process of
deindustrialization. Only after the conquest of inflation can Keynesian-
type weapons become again available for re-industrialization and
regional stimulation, and then only for a limited, medium-term period.
In most countries the current anti-expansionist monetary pendulum
probably still has until around the turn of the century before the
movement back in favour of Keynesian expansion reasserts itself.
Mounting, if belated, concern about the vast increase in population
occurring mainly in the poorest countries, the depletion of finite
resources, the problem of global pollution and other environmental
concerns are at best only partially amenable to free-market solutions.
The market gives no priority to posterity or the poor: silent majorities.
As the costs of market failure become more obvious, so will the need for
increased co-operative governmental intervention. (Perhaps concern
about global warming and the ozone layer might even replicate the
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GLOBAL MONEY IN HISTORICAL PERSPECTIVE
'sun-spot' theories of the nineteenth century as contributory causes of
economic disequilibrium.) The wide, long-term oscillations to which
monetary policies are prone are brought about not only by the
obviously strong destabilizing forces of wars, famines, inventions and
so on, but also because money itself frequently exerts its own inherent
instability. While it is readily conceded that 'real' factors can push
demand and supply so much out of balance that cumulative
disequilibrium may follow, it is not sufficiently emphasized that money
contains within its many-sided nature dynamic features that also can be
destabilizing. More notice is usually given to the other functions of
money, in facilitating the myriad exchanges of daily commerce, where
money is the indispensable equilibrator, a cybernetic mechanism of
immense power and delicacy: but it is not infallible.
We have seen that most theories of money tend to fall into one of two
contrasting groups which, however, given a long-term perspective, are
complementary. Writers of the first group emphasize the importance of
limiting the quantity of money in order to enhance or maintain its value
or quality. The second group of writers are more concerned with
allowing or encouraging an expansion in the effective quantity of
money so as to stimulate economic growth or at least to remove any
brake on such growth, notwithstanding the decline in the quality of
money which might result from such expansion. Among this latter
group, Schumpeter and Keynes were in agreement that it was the
entrepreneurs with their 'animal spirits' that disturbed the 'status quo'
which economists call equilibrium. In borrowing to fulfil their
ambitions, the entrepreneurs alter the previous flows of saving,
investment and income in ways which not uncommonly become
cumulatively destabilizing. Briefly, then, the money pendulum is likely
to be set in motion even when there are no external shocks, but its
amplitude tends to be increased by the frequent though random
appearance of such shocks.
In the normal course of events money is rarely 'passive' or 'neutral',
while the safe haven of equilibrium on which so much economists' ink
has been spilled and which still appears to inspire the dangerous, earth-
flattening zeal of the Brussels bureaucracy, is equally rarely attained. An
assumption, possibly unconscious, of some ideal equilibrium may lie
behind Euro-planners' enthusiasm for 'level playing fields' for all the
Community's financial and other economic units, and so carries the
danger of imposing a far too restrictive network of rules and
regulations with regard to fiscal, financial and industrial policies. In
this connection Lord Robbins's view is even more relevant now than
when he first produced his masterly analysis over fifty years ago: 'There
GLOBAL MONEY IN HISTORICAL PERSPECTIVE
659
is no penumbra of approbation round the theory of equilibrium.
Equilibrium is just equilibrium' (1940, 143). Sir Gordon Richardson,
when Governor of the Bank of England, wrote of his experience as
follows:
I regret to say that I have little direct experience with economic equilibrium
- indeed, so far as I am aware, none at all. I sometimes see suggestions that
we shall be moving towards equilibrium next year or perhaps the year after:
but somehow this equilibrium remains firmly in the offing. In the mean
time, governments and central banks are likely to be faced with a series of
difficulties which have to be addressed. (IMF Essay on 'The Pursuit of
Equilibrium', Euromoney, October 1979)
While the swings of the pendulum cannot thus be held fixed at mid-
point, the art of monetary policy consists of moderating their
amplitude rather than seeking to achieve some unobtainable, unreal,
theoretic goal of equilibrium.
There is ample evidence to show that monetary policies, whether
expansive or restrictive, can when appropriately applied and supported,
work remarkably well — but only for a limited short- to medium-term
period, without having to be radically readjusted. If pushed too far or
carried out for too long, as happens when policy-makers become
convinced of the eternal verities of the scribblings of some transient
economist, then both kinds of policy suffer from a pernicious form of
macro-economic diminishing returns. Sound money, in the sense of an
optimally adjusted supply, is the foundation both of capitalism and of
freedom. It is therefore fitting and timely that the last two comments on
the fundamental importance of money should be ascribed to two
famous Russian writers. 'Lenin is said to have declared that the best way
to destroy the Capitalist System was to debauch the currency' (Keynes
1920, 220). Dostoevsky's comment is more concise and positive:
Money is coined Liberty}
2 F. M. Dostoevski, The House of the Dead (1862, Eng. trans. 1911), Chapter 2.
13
Further towards a Global Currency
The epoch-making euro
By far the biggest changeover in monetary history was successfully
completed in the first two months of 2002, when twelve nations
comprising over 300 million people gave up their own currencies and
replaced them with euro notes and coins. The centuries-old dream of
resurrecting the single currency system of the Roman Empire had
finally become a reality. For some years after around AD 800 the
popularity of Charlemagne's currency, which like the English penny,
was copied and circulated over much of Europe, renewed hopes that the
nebulous Holy Roman Empire might develop an international currency.
The gold 'solidus' of the Emperor Constantine (ad 306-37) continued
to be issued from Constantinople and circulated widely for hundreds of
years after the fall of the western empire around AD 410. However,
despite a few sporadic and mostly short-lived successes the numerous
minor states, dukedoms, bishoprics and municipalities struggled to
gain the benefits of seigniorage by issuing their own local currencies,
though sometimes agreeing to common standards with their neigh-
bours. As we have already seen (p. 145 above) a number of similar gold
coins were issued in western Europe in the thirteenth century, the most
popular and widely used being the florin first issued in Florence in 1252.
A co-operative venture, the Rhenish Monetary Union of 1385
established standardized coins in the Palatinate and the bishoprics of
Trier, Cologne and Mainz and lasted at least until around 1515. A
similar kind of agreement between Edward IV and Charles of Brabant
in 1469 quickly petered out when failing to attract public support.
FURTHER TOWARDS A GLOBAL CURRENCY
661
However, apart from sharing popular currencies such as the Maria
Theresa thaler in the eighteenth century, continental Europe had to wait
until early in the nineteenth century before realistic attempts were
made, led by France, to unify its overnumerous, confusing and trade-
inhibiting currencies (and its weights and measures). Sterling, by far the
strongest currency in the nineteenth century, promoted free trade based
on its long-established gold standard, whereas France persistently
advocated a bimetallic system.
'In nothing is the English nation so conservative as in matters of
currency', asserts Milton Friedman when referring to Britain's ability to
shake herself free from entanglement with the bimetallist movements in
France and the USA in the second half of the nineteenth century.1 If the
confident optimists who made themselves prominent in the plethora of
monetary conferences held in that period had managed to achieve
greater credibility the world might well have adopted a universal
monetary union based on a uniform gold coin representing 25 francs, 5
dollars and 1 sovereign. If Britain had raised the gold content of the
sovereign by about 1 per cent, if the USA had made a similar adjustment
in the opposite direction and if France had raised its seigniorage charge
slightly to 1 per cent, then, said the optimists, the whole of the civilized
world would have followed this lead and the ideal of a universal single
money system would have resulted.
The harsh reality of wars and the disruptive effect of imbalances in
relative supplies of gold and silver prevented these idealistic dreams
from becoming reality, as the world split into a limping bimetallist
system led by France and the continuation of Britain's conservative gold
standard, which other countries like Germany in 1871 and the USA in
1900 decided to join as being the better bet. All the same two European
monetary unions did emerge, one large Latin Monetary Union from
1865 and the much smaller Scandinavian model from 1872. One of the
main aims of France in arranging the formation of the Latin Union was
'to secure a monetary hegemony over other states by inducing them to
adopt her system, and thus to obtain an influence over them which
might be transmuted . . . into a political leadership'.2 This was but a
continuation by Napoleon III of that pressed by Napoleon I earlier in
the century. Thus in a letter to the king of Naples on 6 May 1807 the
first French emperor wrote: 'Brother! When you issue coins I would like
you to adopt the same valuations as in French money ... in this way
there will be monetary uniformity all over Europe [as with de Gaulle,
1 M. Friedman, 'Bimetallism revisited', Journal of Economic Perspectives (Fall 1990),
97.
2 H. P. Willis, A History of the Latin Monetary Union (Chicago, 1901), p. 143.
662
FURTHER TOWARDS A GLOBAL CURRENCY
Britain was non-European] which will be a great advantage for trade.'
The same letter was written to other heads of state.3 These sentiments
were strongly supported by the French public, even by those opposed to
the regime. Victor Hugo, writing in 1855, proposed 'one Continental
money, which would drive the activities of 200 million people, instead of
all the absurd varieties of money we have today'.4 Though not then
reaching 200 million, France was joined in the Latin Union by Belgium,
Switzerland, Italy, the Papal States, Greece and Romania, while Spain,
Austria, Hungary and Bulgaria aligned some of their gold and silver
coins to the French system. Germany remained aloof, and was criticized
for not even attending some of the conferences. The much smaller
Scandinavian Union comprised Denmark and Sweden with the
reluctant and partial addition of the more independently minded
Norway. (Plus ca change . . . ). After a few stumbling decades both
unions were swept away by the First World War. In practice they had
not amounted to much, but they represent the closest precedent we have
to the EMU of today.
Opinion in Britain was divided, with the manufacturing sector being
generally in favour of monetary union and the financial sector mostly
being opposed (apparently the converse of today). 'The Association of
Chambers of Commerce of the United Kingdom, in a session held at
Birmingham the 16th and 17th of November, 1869, decided
unanimously that a report should be presented in favor of the
internationalization of Coinage.'5 In contrast, the conclusion of the
Bank of England when asked to express its opinion to the International
Monetary Conference in Paris, 1881, was not to become involved 'on
the ground that a subject partly of abstract science and partly of
political application was not its business'.6 Such divided opinions were
rehearsed again at tiring length before the Royal Commission on the
Precious Metals, 1888. In the end they decided on a very British,
3 Correspondence de Napoleon I, Tome 15 (Paris, 1854), p. 199.
4 V. Hugo, Actes et paroles pendant I'exil (Paris, 1861), pp. 138-9.
5 International Monetary Conference. Held in Paris, 1878, published by the
Government Printing Office (Washington, 1879), p. 383.
6 Sir John Clapham, The Bank of England (Cambridge, 1944), II, p. 313. No longer
aloof, the Bank successfully coordinated the technical preparations for the
integration of Europe's markets 'of which London is the biggest international centre
by far . . . Whether the UK is in or out, the City of London's broad and liquid
markets in the euro are an asset for the whole of Europe', Bank of England Report,
1999, p. 5. Similarly, 'the Mint has played a full part in the efforts of the European
Mint Directors Working Group' and has 'completed contracts to supply copper-
plated steel blanks for euro coins from seven of the eleven countries introducing the
euro coinage in January 2002', Royal Mint Annual Report 1998-9.
FURTHER TOWARDS A GLOBAL CURRENCY
663
pragmatic 'wait and see' policy: 'any scheme which involves a great
alteration in our system of currency would be so opposed to the
traditions and prejudices of the people of this country, that we think
some considerable period of time must elapse before it will have gained
that amount of support among the public which will entitle it to be
considered as a practicable proposal.'7 They did not even suggest a
referendum; but now at long last official policy is to 'prepare and
decide'.
A decent interval of time having now elapsed and a truly great
alteration having just taken place on our doorstep involving over 300
million of our neighbours, the decision time for the UK would finally
appear to be of the highest urgency and priority. Above all it remains a
political decision, made by government, not markets, by the still
sovereign power, not by the sovereignty of the consumer. The decision
as to whether and when to enter into Stage III of EMU is dependent on
a referendum if some future (Labour?) government considers the time
and price to be right. Though the future decision is to be fully
democratic, the criteria on which the government's case is being put
forward are entirely economic.
In 1997 the government commissioned an assessment of the
economic consequences of EMU from which it derived the following
five criteria:
(a) what would be the effects on employment, growth and stability?
(b) what would be the impact on financial services and the City?
(c) how would it affect investment, particularly from overseas?
(d) if problems emerge is there enough flexibility to deal with them?
(e) are business cycles and economic structures compatible with those
of the Euro-zone so that we could live comfortably with euro
interest rates?8
The report concludes that membership of EMU has the potential to
enhance growth and employment, but only if there were sufficient
convergence and flexibility within the UK and EU economies.
Obviously to some degree judgement of the outcome is likely to be
subjective, with the various interested parties supporting their cases
with selective statistics. Even the more objective and quantified targets
laid down by the Maastricht treaty for calculating convergence were
interpreted elastically enough to allow all twelve applicants to be
7 Final Report of the Royal Commission on the Precious Metals (London, 1888),
pp. 53, 168.
8 HM Treasury, 'UK Membership of the Single Currency: An Assessment of the Five
Economic Tests', October 1997.
664
FURTHER TOWARDS A GLOBAL CURRENCY
admitted to the third stage, even including Greece. Since these criteria
will also be used for judging future potential entrants - and therefore
are relevant to the UK's situation - they may too be briefly summarized:
(a) consumer prices not to exceed 1.5 per cent above the average in the
three best countries of the EU;
(b) exchange rate to be within the 'normal' bands of the Exchange
Rate Mechanism for two years (now 'ERM2')
(c) long-term interest rates were not to exceed 2 per cent above the
average in the best three countries;
(d) each national central bank's legislation had to be compatible with
that of the European Central Bank and guarantee the political
independence of those banks.
(e) budget deficits were not to exceed 3 per cent of GDP;
(f) government debt was not to exceed 60 per cent of GDP.9
The fiscal disciplines of the convergence criteria have been carried
forward in enhanced form in the 'Stability and Growth Pact'. If fiscal
discipline is not enforced the ECB's monetary objectives are thwarted.
The Bank's main objective is to help to achieve price stability, defined as
an annual increase of retail prices of up to 2 per cent, with a reference
guide for increases in broad money, M3, of AVi per cent. None of this
should prove to be a barrier to UK entry. The real difficulties lie
elsewhere, for example in the EU's apparently arrogant, legalistic and
insufficiently accountable bureaucracy; in the multitude of its costly
and enterprise-inhibiting rules and regulations; in the appropriate entry
level of the pound; in the Common Agricultural Policy, in labour
immobility, tax harmonization, unfunded pensions, the rebate, the loss
of sovereignty, the cost of lost output through a 'one size fits all'
monetary and fiscal policy and the irreversibility of the decision.
According to the European Monetary Institute 'major improvements
in convergence have been seen in the EU since 1996'. 10 A more recent
research paper by the European Central Bank, in May 1999, concludes
that 'in the last ten years central bank policy rules have displayed a
remarkable tendency to converge', which is likely to have been a factor
helping 'the increased correlation of economic performance'.11 In other
words EU countries have grown more alike, dragooned by their
9 Barclays Bank, 'EMU: a Guide for Business', November 1996.
10 European Monetary Institute, Convergence Report (1998), p. 4.
11 L. Angelona and L. Dadola, 'From the ERM to the euro: new evidence on economic
and policy convergence', European Central Bank, May 1999.
FURTHER TOWARDS A GLOBAL CURRENCY
665
convergent policies. Some central banks have had to amend their
legislation so as to ensure that the total issues of coins come under the
ECB as part of its control of the money supply. Surprisingly a somewhat
similar 'proposal was made in the year 1780, by Mr [Edmund] Burke, to
abolish the Mint, and place the coinage entirely in the hands of the
Bank of England'.12
Like Britain, Denmark and Sweden have so far remained outside the
Eurozone. Denmark held a referendum on entry on 29 September 2000
and, to the surprise of the government, the larger trade unions and most
big businesses, decided by a significant majority of 53 per cent to 47 per
cent not to join the Eurozone. Sweden similarly has up to now remained
aloof, while Norway and Switzerland are not in the EU. One apparently
strong argument in favour of their joining the Eurozone is that the bulk
of their trade is with that zone. However, the example of Canada,
whose trade is much more strongly tied to its giant US neighbour, shows
that Canada still prefers the flexibility allowed by having its own
currency, interest rate, monetary and fiscal policy.
Despite the caution and euro-scepticism of the 'outs' the political
leaders of France and Germany, undeterred, led the drive to ever closer
political, economic and monetary union. One of the earliest post-war
steps in this direction was Robert Schuman's report in 1950 which led to
the formation of the European Coal and Steel Community, comprising
France, West Germany, Italy, Belgium, Holland and Luxembourg,
which was itself the forerunner of the Treaty of Rome which established
the European Economic Community in 1957. Article 2 of that Treaty
made it clear that the Community's aim was to establish 'an economic
and monetary union'. This plan was carried forward further by the
Werner Report of 1970 which called for closer parity rates and the
removal of restraints on the movement of capital. The Delors Report of
1989 set out a firm three-stage programme, the first being based on still
closer coordination of economic and monetary policies (see pp. 449-55
above). Stage II began in 1994 with the setting up of the Monetary
Institute (in Frankfurt), which became the European Central Bank in
1998. Stage III began on 1 January 1999 with the euro operating as a
virtual, wholesale currency in the eleven eurozone countries, joined by
Greece as from 1 January 2001. Table 13.1 gives the conversion rates of
the twelve former national currencies, ranging from the heavy currency
of the punt of Ireland, at 0.787564 to the euro, to the weak Italian lira,
at 1936.27 to the euro — a powerfully liberating simplification of a
chaotic historical legacy. Technically this massive monetary changeover
First Annual Report of the Deputy Master of the Mint, 1870 (London, 1871), p. 13.
666
FURTHER TOWARDS A GLOBAL CURRENCY
was highly successful, involving the issue of around 15 billion notes and
50 billion coins produced and distributed securely with hardly a hitch.
However, the fall in the euro's international value shows that it is much
too early to judge the euro's standing in the world's currency markets.
Before the substantial fall in its value there was much wishful thinking
that parity with the dollar could have been established so that an
expanding euro could merge with growing dollarization and act as a
magnet to attract other large countries such as India, Pakistan and even
China, so that an almost global currency system might have resulted.
Furthermore, the constraints of the Stability and Growth Pact, among
other things, seem to have widened the gap between the US and the
slower Eurozone's growth rates, postponing any such monetary parity.
Table 13.1. The Fixed Conversion Rates per Euro
Country
Currency
Rate per 1 Euro
Austria
Schilling
13.7603
Belgium
Franc
40.3399
Finland
Markka
5.94573
France
Franc
6.55975
Germany
Deutschemark
1.95583
Greece
Drachma
340.750
Ireland
Punt
0.787564
Italy
Lira
1,936.27
Luxembourg
Franc
40.3399
Netherlands
Guilder
2.20371
Portugal
Escudo
200.482
Spain
Peseta
166.386
The irreversibility of the changeover was based largely on the
assumption, as yet unproven, that the benefits through greater price
transparency, keener competition and the elimination of former foreign
exchange costs would clearly outweigh the heavy initial costs of the
change and any costs from centralizing monetary and fiscal policy. In
the main, however, the euro was the result of agedong political pressure.
The euro represents political economy on a grand scale. The European
Central Bank was pitifully pained and puzzled by the fall in the
international value of the euro since launching its wholesale form in
January 1999, when it traded at a high point of 1.17 US dollars, only to
fall to around 0.86 when the changeover to euro notes and coin was
completed in February 2002. In an article in its monthly bulletin of
January 2002 on 'Economic fundamentals and the exchange rate of the
FURTHER TOWARDS A GLOBAL CURRENCY
667
euro' it tried its best to claim that the euro was considerably
undervalued and that exchange rates had moved out of line with
fundamentals such as purchasing power parity. (Obviously the ECB was
the only one in step in the forex army.) It is also of considerable
significance to observe that - at the dawn of the age of electronic money
- it was not until hard cash, in the form of euro notes and coins, was
actually in the hands of the people, and all the previous national
currencies terminated, that the main aim of the long line of European
integrationists could be considered finally to have been accomplished.
More coins in an increasingly cashless society
Historians need to put in a good word for numismatists for they help to
bring the past vividly to life. A brilliant instance of this took place at an
auction by Sotheby's on 5 July 1995 of some two hundred ancient coins,
estimated to fetch £lVi million but actually realizing £2,099,295. The
collection, reckoned to be the most important of its type to be
auctioned in London for over fifty years, included a selection of
electrum, gold and silver coins spanning a thousand years. An aureus of
Maxentius Aurelius, AD 306-12, was sold for £71,500, with the highest
price, £132,000, being reached for a tetradrachm of Naxos, Sicily, of
around 460 BC. These costly examples eloquently remind us that for
most of the last 2,700 years coins have been by far the most important
form of money. At the end of the twentieth century it is, surprisingly,
still true that more coins are being produced and put into daily use by
more people around the world than ever before, despite the fact that
during the past three or four centuries paper money has grown first to
supplement and then practically to supplant coins in terms of their
relative values. As we enter the new millennium the rapid rise of
completely new forms of money substitutes in the shape of plastic and
electronic money finally threaten to accelerate the apparent terminal
decline of the longest-lived, most tried and tested kind of money known
to civilized society. Are coins, which have been dismally neglected by
most economists for seventy years or more, finally to disappear into the
dustbin of history, to be treasured only by numismatists and the
occasional aberrant economic historian?
Far from dying, however, a new exuberant florescence of recoinage is
currently under way, fed by three powerful stimuli: the historic
changeover to a Single Currency which, as we have just described
required a new series of Euro-coins to replace the many existing varieties
from the year 2002 onwards; similar replacements for the new
democracies of the former Soviet Union and its satellites; and, much the
668
FURTHER TOWARDS A GLOBAL CURRENCY
greatest, the demands of the growing poor multitudes in the Third
World. For the poor are always with us, more so in the years ahead, and
so also for the foreseeable future will be the necessity for hard cash, the
poor man's credit card. (Popular slogans, as in this case, often out-
perform expert predictions.) Even before such impending demands arise,
confirmation that the actual amounts of currency being produced in
recent years are at record, best-ever levels is proven by the figures available
from the annual reports of the Royal Mint for the years 1993 to 1995 and
from a special study by P. B. Kenny on behalf of the Mint: 'The Number
of Coins in Circulation', the first such study since the preparations for
decimalization in 1971 {Economic Trends No. 495, Jan. 1995). The
Mint's report for 1993^1 shows that 'the production of blanks and coins
[at nearly 3.5 billion], operating profit and export sales [to seventy
countries] were all substantially in excess of the best achieved in its long
history' of over a thousand years. Furthermore, 'the number of UK
circulating coins issued, at 1,366 million, was a 21 per cent increase on
1992-3'. Table 13.2 shows that the number of coins in circulation in the
UK in December 1994 was well over 17 billion with a total value of nearly
£2 billion. It also indicates that, with the sole exception of the unloved
50p piece, there is, just as one would expect, an inverse relationship
between the values and the volumes of each denomination.
Further confirmation of the continuing popularity of cash, i.e. coins
plus notes, is given by Susan Bevan in an article entitled 'Cash is still
king', where she comments: 'The cashless society, with clumsy and
expensive to handle coins and notes replaced by efficient electronic
payment messages, is a dream cherished by banks, but the British public
remains firmly attached to the traditional way to pay' {Banking World,
Oct. 1994, 16). Cash transactions actually increased in 1993, probably a
temporary regression because of the recession, and accounted for 63 per
cent of all the 26.7 billion transactions of more than £1 in value made in
that year. The recent increase in output by the Royal Mint was far
exceeded by the enormous potential demand for new 'Euro' coins which
the twelve Eurozone countries issued in 2002. Even allowing for
considerable slippage in timing and in the number of countries
participating, the prospect emerges of an unprecedentedly large,
contemporaneous demand from up to 370 million customers during the
first decade or so of the new millennium. Politics, not economics, will be
the decisive factor determining the pace and extent of these monetary
changes in the EU and the former command economies of the Soviets and
satellites - but that, as has been amply demonstrated above, is nothing
new. Between 1993 and 1995 the Royal Mint had already found customers
in Estonia, Mongolia, Turkmenistan, Croatia and the Czech Republic.
FURTHER TOWARDS A GLOBAL CURRENCY 669
The paradox of coin: rising production - falling significance
Table 13.2. Coins in circulation in the UK, December 1994:
values and numbers (million).
Denomination
£ million
%
Number
%
IP
64
3.2
6,400
37.0
2p
78
4.0
3,900
22.6
5p
133
6.8
2,660
15.4
lOp
134
6.8
1,340
7.8
20p
297
15.2
1,485
8.6
50p
240
12.3
480
2.8
£1
1,012
51.7
1,012
5.8
Total
1,958
100.0
17,277
100.0
Table 13.3. Narrow and broad money supply in the UK, December
1994 (£ million).
Coin
1,958
% M4 =
Notes
19,891
Banks' operational balances
%
Bof E
175
0.03
Narrow Money (MO)
22,024
4.0
Bank & Building Soc. Deposits
546,411
96.0
Broad Money (M4)
568,435
100.0
3.6
'cash' 21,849 (3.9%)
NB Coins = l/10th of 'Cash' and only l/300th of total money supply.
Sources: Royal Mint; BEQB, Feb. 1995, and Bank of England Monetary
Statistics, Feb. 1995.
The market for coins in the so-called Third World is likely to be even
larger for a number of reasons which can only be hinted at here. First,
above a certain very low threshold, the demand for coins by the poor is
proportionately, and in many cases absolutely, higher than that by
richer persons, who have easy recourse to other forms of payment
denied to, or made difficult for, the poor. To the economist coins are
not merely 'inferior goods' but exhibit 'Giffen' tendencies where an
individual's demand for coin actually falls when his income rises to a
670
FURTHER TOWARDS A GLOBAL CURRENCY
Table 13.4. Twenty countries with severe inflation 1990-1994
compared with 2000 (percentage increase in consumer prices over
previous year).
1991
1992
1993
1994
2000
Argentina
211.5
79.1
35.4
28.8
-9.1
Brazil
380.6
744.9
1,584.4
5,329.8
18.9
Nicaragua
3,726.0
53.0
-1.0
13.0
-8.3
Mexico
91.6
70.3
17.3
10.9
14.0
Peru
476.4
78.2
76.5
30.7
-5.4
I Jnifnin v
104.0
93.0
64.5
38.4
-3.5
Venezuela
V L 11VZ. LIL 111
52.7
26.5
-2.5
101.4
25.3
Guinea-Bissau
59.3
50.8
42.7
46.7
8.6
Kenya
16.6
29.7
37.4
18.0
5.9
Zimbabwe
34.5
11.7
40.0
55.3
58.5
Zaire
1,083.0
5,498.0
1,658.0
8,377.0
n.a.
China
25.5
31.6
27.9
n.a.
16.1
India
17.5
20.2
10.1
21.5
10.7
Pakistan
19.0
20.0
8.2
10.9
10.1
Korea
19.7
35.6
18.4
9.8
5.9
Turkey
45.9
59.2
78.4
72.4
53.5
Israel
26.5
22.8
25.8
19.7
2.5
Poland
65.7
31.4
31.8
35.6
-6.4
Estonia
n.a.
291.5
133.2
40.3
20.5
Russian Federation
n.a.
1,533.2
883.3
302.9
66.9
n.a. = not available or not applicable.
Source: IMF 'International Financial Statistics', Nov. 1995 and Jan. 2002.
higher level. (To the numismatist, in contrast, for those rich people who
can afford to purchase the kind of coins auctioned at Sotheby's, such
coins are 'superior goods', prized for the high prices they command and
are typical of what the US economist Thorstein Veblen first called
'conspicuous consumption'.) Thirdly, allied to the above factors, is the
remarkably young age distribution in most Third World countries.
Fourthly, the size and growth of population in the poor countries
greatly exceeds that in the rich. Fifthly, the infrastructural assets, such
as telecommunications, essential for the development of non-cash
systems are not as available or reliable as in rich countries. Finally
inflation in poor countries generally greatly exceeds that in the
advanced nations - and inflation feeds the need for repeated recoinages
for a rapidly growing money supply.
FURTHER TOWARDS A GLOBAL CURRENCY
671
Table 13.5. Twenty countries with low to moderate inflation
1983-1995 and 1999-2000.
(annual average increase in consumer prices)
1983-92
1993
1994
1995
1999
2000
Japan
1.8
1.3
0.7
0.1
-0.3
-0.7
Netherlands
1.8
2.6
2.8
2.4
2.2
2.5
(West) Germany
2.2
4.1
3.0
2.3
0.6
1.9
Austria
3.0
3.6
3.0
2.5
0.6
2.4
Switzerland
3.2
3.3
0.9
1.4
0.8
1.6
Belgium
3.5
2.8
2.4
1.8
1.1
2.5
USA
3.8
3.0
2.6
2.8
2.2
3.4
Denmark
4.2
1.3
2.0
2.4
2.5
2.9
Canada
4.3
1.8
0.2
1.6
1.7
2.7
France
4.4
2.1
1.7
1.7
0.5
1.7
Finland
5.3
2.2
1.1
1.8
1.2
3.4
United Kingdom
5.5
1.6
2.5
3.4
1.6
2.9
Norway
5.7
2.3
1.4
2.6
2.3
3.1
Australia
6.4
1.8
1.9
3.9
1.5
4.5
Sweden
6.7
4.6
2.2
2.6
0.5
1.0
Italy
7.4
4.2
3.9
4.4
1.7
2.5
Spain
7.6
4.6
4.7
4.8
2.3
3.4
New Zealand
7.9
1.3
1.8
4.0
-0.1
2.6
Portugal
14.9
6.5
5.2
4.5
2.3
2.9
Greece
18.0
14.4
10.9
10.6
2.6
3.2
Sources: Bank for International Settlements, Annual Reports and Inter-
national Financial Statistics, Jan. 2002.
When we turn to examine the total values rather the volume of
transactions, then the picture changes dramatically and a clear
explanation emerges to account for the paradox of coinage, namely its
rising absolute production combined with its falling relative economic
significance, as is illustrated by the figures given above. Table 13.3
shows that the total value of coins in circulation in the UK in December
1994 was just one-tenth of notes and only one-three-hundredth part of
the total broad money supply, M4. Obviously there is no gainsaying,
even when every allowance is made for velocity of circulation, that coins
are more than ever merely the very small change of a modern country's
money supply. Nevertheless, everywhere around the world they remain
stubbornly indispensable, a vigorous anachronism, surprisingly but
indisputably likely to grow substantially in absolute volume for decades
to come. Despite the fact that we all learn our first monetary lessons
through coins - lessons which we might well think would therefore be
672
FURTHER TOWARDS A GLOBAL CURRENCY
indelible — the true influence of coins on modern social, economic and
political history has been grossly underestimated. A challenging
exception to this general neglect is to be found in the recent stimulating
researches of Professor Angela Redish of the University of British
Columbia - for example in assessing the relationship between Britain's
improved token coinage and its early formal adoption of the gold
standard; and the contrasting picture in France and the Latin Monetary
Union where bimetallism belatedly persisted. A pale reminder of
nineteenth-century bimetallism now being introduced in many mints is
the production of bi-coloured coins for high-value denominations
(thus partly replacing low-value banknotes). These increase the
'grasp' of coins up the income chain: and that, as we have seen, was the
original meaning of 'drachma' when coinage began its not-yet-ended
Odyssey.
Turning to the economically dominant non-cash payments, accord-
ing to Britain's Association for Payment Clearing Services (APACS), in
the mid-1990s over 90 per cent of adults in the UK held a bank or
building society account, over 75 per cent possessed a plastic debit or
credit card, while over 75 per cent of the workforce were paid through
Bankers' Automated Clearing Services (BACS). Paper-based systems,
mostly cheques, peaked in use in 1990, their subsequent fall more than
being made up by the rise in plastic card and other forms of automated
payment. In terms of volume, around nine million cheques were still
being cleared through the Cheque and Credit Clearing Company on
average every day in 1994. One small but interesting page of history was
turned when the old Town Clearing, first set up in 1773, was closed in
February 1995. High value payments were normally cleared 'same day'
through the Clearing House Automated Payment Scheme (CHAPS) and
totalled well over 90 per cent of the value of all average daily clearings.
As a result of co-operation between the Bank of England, CHAPS and
APACS, the speed and security of large value payments was still further
improved by the introduction of a 'Real Time Gross Settlement System'
from mid-1996. (For later figures see p. 678.)
The picture in other major economies is roughly comparable. Thus
in the USA 'based on value, over 90% of all transactions are now made
electronically. Based on volume, over 90% are still made by cash or
check' {Federal Reserve Board Review, Kansas, 3rd Quarter, 1995). It is
the disproportionately high costs, especially in high income countries,
of providing cheques and coin payments which has acted as the main
spur for banks in their efforts to extend electronic payment systems
more widely at the retail level. Of the costs of providing payment
services as a whole in the UK in 1993, assessed by APACS at £4.5
FURTHER TOWARDS A GLOBAL CURRENCY
673
billion, by far the greater part is attributable to cheques and coins.
Interbank competition holds back attempts to charge customers
directly anything near the full cost of providing paper services:
customers pay when buying other services, thus distorting resource
allocation. Similarly the public's atavistic attachment to coins acts as a
brake on any rapid development of electronic cash at the retail level.
Nevertheless, trials of such systems are being undertaken in a number
of countries. In the UK a multifunctional card or 'purse', optimistically
called Mondex, was introduced in Swindon in July 1995. NatWest, its
parent, together with Midland and Bank of Scotland are co-operating
in its further extension. The franchise for the Far East has been bought
by the Hong Kong Bank, while the Royal Bank of Canada and the
Imperial plan to cover Canada. In November 1995 the Mark Twain
Bank of St Louis, Missouri, introduced a new form of digital currency
developed by David Chaum, one of the world's leading experts on
computerized currency.
Now that wholesale payments have been caught in the full tide of the
electronic revolution, traditional commercial banks will face stronger
competition from non-banks and from 'dis-intermediation' as lenders
and borrowers can deal more easily directly with each other without
needing a financial intermediary. Central bankers' tasks in attempting
to define, measure, monitor, control and supervise their own countries'
changing forms of money and monetary institutions, will become much
more complex as the old boundaries between national and regional
monetary domains will be broken down by new forms of competitive
currencies. Wholesale systems, despite the obvious security problems,
seem technically capable of being adapted to deliver some kind of
global 'single currency' early in the new century (see G. Keating,
Financial Times, 2 November 1995, 15).
The European Commission's plans for 'One Currency for Europe',
published as a Green Paper in May 1995, together with the Cees Maas
Report of the 'Expert Group on the Changeover to the Single
Currency', spoke in confident tones, justified in the event. The Green
Paper boldly began: 'By the end of the century, Europe will have a single
currency. This was the wish of its peoples and leaders in signing and
then ratifying the Treaty of European Union' (p.3). Furthermore:
'Establishment of the single currency will be completed only with the
introduction of the ecu as the single currency in all its aspects, including
notes and coins' (p. 4). With regard to large value payments it goes on to
say: 'The advent of a single monetary policy' will 'require the
establishment of a European system of real time gross settlement.
TARGET (Trans-European Automated Real time Gross settlement
674
FURTHER TOWARDS A GLOBAL CURRENCY
Express Transfer) will be the payments system for the implementation
of the monetary policy of the ESCB in ECU' (p. 40). Similarly, the Maas
Report predicted that 'at the end of 1999, the old currencies will be
exchanged for the new currency over a brief period whereupon the new
currency will be the only legal tender in EMU countries. The rapid
introduction of the ECU as the single currency will then be a reality'
and 'there will be no need to continue with the current basket ECU'
(p. 10). In December 1995 at the Madrid Summit Meeting, it was agreed,
unanimously but unenthusiastically, to call the new currency, the 'Euro',
a name apparently uncontaminated with national or historical
connections.
In any event, as far as retail, small-payment systems are concerned,
coins have clearly demonstrated their indestructibility and seem able to
survive and indeed to thrive alongside any kind of competitor. Even in
the long run they are not dead.
Speculation and the Tobin Tax
Freedom of trade coupled with flexible finance has provided a far more
efficient allocative and productive system than any alternative, such as
command economies, as numerous examples conclusively prove, from
Athens as opposed to Sparta in the ancient world to the USA contrasted
with the USSR in modern times. This truth is now being recognized by
command economies like China, which was admitted to the World
Trade Organization in 2001 and is now beginning to reform its banking
system on western lines following its own example of Hong Kong.13
However, no human system is perfect and the very freedom which on the
whole allows the best chance of progress enables individuals and
institutions, large and small, to exploit the system, legally or illegally, for
their own ends. Hard bargaining slips easily into taking unfair
advantage, with companies and countries using their monopolistic and
monopsonistic powers to the detriment of their weaker rivals. Arbitrage
which normally narrows price differences can at times grow into
perverse speculation which widens them. Natural disasters such as
famines, floods, earthquakes, volcanic eruptions and so on, together
with periodic cycles -such as 'sunspot' and El Nino cycles - are not
13 'Chinese commercial banks are busy preparing for the challenges brought by the
country's accession to the WTO' {China Daily, 9 Feb. 2002); although even the
Government admits that the non-performing loans held by its banks total $218
billion or 27 per cent of total bank lending. Outside observers put the figure at 44 per
cent and believe that China is grappling with a problem even more serious than that
of Japan ( Washington Post, 13 Jan. 2002).
FURTHER TOWARDS A GLOBAL CURRENCY
675
always dampened, but are often made worse by manmade reactions
including 'beggar-my-neighbour' economic policies. Even without the
trigger of natural disasters, wars or trade wars, the business cycle with
its costly excesses is endemic in our free-trade system. Speculative booms
such as the Tulip Mania in Holland have already been described (pp.
551-3, but the recent development of electronic money and derivative
trading has greatly widened the opportunities for more people to
speculate with more money than ever before. It is worth repeating that
the price of freedom of trade is eternal vigilance. Because of the
anonymity and widespread acceptance of money, financial fraud is
always likely to be among the most attractive and direct of the criminal's
temptations, from forgery to money-laundering, but it must be
emphasized that many of the most calamitous of financial failures began
with the cleverest of people operating with the best of intentions.
Incompetents and Nobel Laureates find themselves in the same basket.
'Speculation', according to Arestis and Sawyer, 'can be defined as the act
of buying or selling with the aim of benefiting from price movements,
rather than to finance international trade, or to acquire interest-bearing
assets.'14 In practice, however, it is difficult to separate these various
functions, while the skills acquired by 'speculators' benefiting from price
movements have normally contributed considerably to more efficient
markets in international trade, productive investment and economic
development. Although some forms of speculation have existed for
hundreds of years, it is its enormously increased scale accompanied by
correspondingly large failures in recent years that has given speculation
its bad name, so that the current attitude among many commentators
reminds one of the remark attributed to Goering: 'Whenever I hear the
word culture, I reach for my revolver.' Around the same time Keynes was
coincidentally pointing out that 'it is by no means always the case that
speculation predominates over enterprise'.15
Before looking at some proposals to curb the excesses of speculation, a
brief reminder of some of the more recent financial frauds and failures,
which have given greater urgency to such proposals, may be in order,
ranging from Germany to Britain, the USA and Japan, to underline the
international nature of the problem. In 1990 Michael Milken, the so-
called 'junk bond king', was sentenced to ten years for fraud which
brought about the bankruptcy of US Drexel Burnham Lambert, costing it
fines of $650 million. In 1994 the German firm Metallgesellschaft,
venturing well beyond its main business, incurred losses of $1.5 billion
through misplaced speculation in oil futures. One of the most notorious
14 P. Arestis and M. Sawyer, 'How many cheers for the Tobin Transactions Tax?',
Cambridge Journal of Economics (1997), pp. 753-68.
15 J. M. Keynes, General Theory of Employment, Interest and Money, 1936, p. 158.
676
FURTHER TOWARDS A GLOBAL CURRENCY
individual instances was that carried out by self-confessed 'rogue trader',
Nick Leeson, which came to light in 1995, and brought down one of
Britain's most prestigious merchant banks, Barings, with losses of £860
million. The sorry tale arose from a combination of old-fashioned greed
escalating into fraud, facilitated by insufficiently supervised derivatives
trading. Derivatives are financial instruments which derive their value
from a price or index of prices in some underlying market and developed
out of traditional hedging and forward trading. Leeson operated mainly
by speculating on small differences in financial futures in markets in
Singapore, Osaka and Tokyo. His strategy was based on his belief that the
Nikkei 225 index of leading Japanese companies would not move
materially from its normal trading range, an assumption shattered by its
fall following the Kobe earthquake of 17 January 1995. The Barings group
was forced into bankruptcy in February and was taken over by
Internationale Nederland Groupe, an expanding 'bancassurance'
institution formed in 1991 when NMB Postbank, Holland's third largest
bank, merged with Nationale-Nederland, its largest insurance company.
Leeson was sentenced to six and a half years in jail, during which time he
completed another profitable deal in writing his insider's story, aptly
entitled Rogue Trader. In 1996 Sumitomo, the world's biggest copper
trader, discovered that it had lost around $2.6 billion over ten years
through fraudulent dealing by Yasuo Hamanaka. In 1997 Professors R. C.
Merton of Harvard and M. S. Scholes of Stanford were awarded the
Nobel Prize in Economics for their research into sophisticated forms of
derivative trading by means of which very small price differences could
yield substantial profit if their formulae were followed on a sufficiently
large scale. Unfortunately this could also lead to enormous losses as was
proved in the next year, 1998, when Long Term Capital Management
incurred losses of $3.5 billion and threatened to bring about widespread
systemic failure. However, a consortium of US-led international banks
collaborated in rescuing LTCM, but at the peril of reinforcing the 'too-
big-to-fail' moral hazard which might encourage other large financial
institutions to be tempted into over-risky business. In early 2002 John
Rusnak, working for a subsidiary of Allied Irish Banks in Baltimore USA,
was exposed as having lost his bank $691 million mainly by trading in
Japanese yen, strangely reflecting the unlearned lessons of the Barings
fiasco. In late 2001, Enron, the energy-based conglomerate, which
employed 20,000 people worldwide and was, on paper, the seventh largest
company in the USA, earned the dubious distinction of becoming the
country's biggest-ever bankrupt, again brought down by its heavy
involvement in derivative trading. Its failure also dramatically highlighted
the dangers of conflicts of interest when its auditors, who failed to give
FURTHER TOWARDS A GLOBAL CURRENCY
677
appropriate warning of impending collapse, earned greater fees as
consultants to the firm than they did as auditors. Who wishes to kill the
goose that lays such golden eggs? These examples help to explain the
renewed public concern about some form of tax to control excessive
speculation, in particular the Tobin tax - probably the most widely and
warmly anticipated tax in history.
Professor James Tobin, Nobel Laureate, suggested a small tax on
foreign exchange trading in 1972 and expanded on this idea with his
'Proposal for International Monetary Reform' in which he claimed that
'speculation on exchange rates' . . . 'has serious and frequently painful
real economic consequences' [Eastern Economic Journal, 1978, p. 154).
Basically, the idea was not new, for around thirty years earlier, Keynes in
his General Theory wrote: 'Speculators may do no harm as bubbles on
a steady stream of enterprise. But the position is serious when
enterprise becomes the bubble on a whirlpool of speculation. When the
capital development of a country becomes a by-product of the activities
of a casino, the job is likely to be ill done' (1936, p.159). With Wall
Street in mind he went on to suggest: 'The introduction of a substantial
government transfer tax on all transactions might prove the most
serviceable reform available, with a view to mitigating the pre-
dominance of speculation over enterprise in the United States' (p. 160).
Tobin transferred the idea from the US stock markets to the world's
foreign exchange markets and added the bait to which most of the
world has now risen, for the proceeds to go largely towards a good
cause, such as increasing the aid given to the world's poorer countries
rather than to the rich speculators generating the proceeds. The average
value of the daily total of foreign exchange transactions comes to
around $1.5 trillion (exceeding the total annual value of world trade).
Thus a small tax, by 'throwing sand in the works', would, Tobin and his
backers claim, reduce the harm done by speculators. Tobin's tax would
be paid twice, once when buying and again when selling, thus bearing
heavily on short-term speculation but progressively lightly on long-term
investment. Other economists, unsurprisingly, disagree. Thus Paul
Davidson, in an article 'Are grains of sand in the wheels of international
finance sufficient to do the job when boulders are often required?',
believes that a Tobin tax 'is unlikely to prevent feeding frenzies that lead
to attacks on major currencies, while it may inflict greater damage on
international trading in goods and services and arbitrage activities'
[The Economic Journal Oxford, May 1997, p.679). Three main
difficulties facing the tax are, first, how to prevent outsiders from
providing attractive tax-free havens; secondly, how the proceeds should
fairly and efficiently be distributed; and thirdly and relatedly, what
678
FURTHER TOWARDS A GLOBAL CURRENCY
powers should be granted to the World Bank, IMF or such other
international overseeing organization? The proposals are strongly
supported by a recent EC study16 and by France - whose share of total
foreign exchange is only 4 per cent - and by Germany - 5 per cent - but
understandably less so by the UK with 31 per cent, or by the USA with
16 per cent, or by Japan, with around 10 per cent of the world market.
The Keynes-Tobin concept is thus likely to remain a highly
controversial issue for the medium-term future.
The end of the old millennium seems to have inspired a number of
terminal studies about the end of history, the end of traditional central
banking and the end of money. As far as the end of money is concerned
the writers have generally meant simply the demise of cash payments
caused by developments in electronic money and smart cards - but as we
have emphasized, the absolute amounts of cash are now greater than ever,
though declining as a proportion of total transactions. A research study
published by the UK's Association of Payment and Clearing Services in
2001 pointed to a continuing decline in the share of cash payments,
although they still accounted for three-quarters of the number of all
payments in 1999 and 46 per cent in the value of all retail payments. The
authors believe that cash will still account for 62 per cent of the number
of all payments in 2010, compared with 73 per cent in 2001. In the USA,
according to the Federal Reserve Bulletin of September 2001, 'from 1980
to 1998 currency in circulation increased by an average of 8% per year',
and after swelling temporarily in December 2000 'in preparation for the
century date change' to reach a record level of $601.2 billion, was
estimated to be $535.4 billion in the first quarter of 2001, in line with the
historical trend (p.567). 'Domestically increases in aggregate spending
will lead to continued increases in the demand for currency . . . including
the growth of coin in circulation' (p.575). In affluent societies small-
denomination coins have a low velocity of circulation, 'lazy' coins that
leak into dormant domestic hoards and consequently involve the mints in
high costs to replace them - another reason for more coins than would
otherwise be necessary. During the long boom of the 1990s in the US,
confident predictions were made regarding a new era in which the old
business cycle had been abolished. The herd instinct, spurred on by
developments in new technology, drove shares in the new 'dot.com'
companies to ridiculous heights, followed by an inevitable collapse.
'Greed, credulity and susceptibility to herd behaviour' had led 'many
intelligent Americans' to believe 'that the marriage of computers and
communication networks had ushered in a new era of permanent
16 See Responses to the Challenges of Globalisation, Commission of the European
Communities, Brussels, 13 February 2002, especially pp. 41-5.
FURTHER TOWARDS A GLOBAL CURRENCY
679
prosperity' (J. Cassidy, in the Prologue of dot.com: The Greatest Story
Ever Sold, New York, 2002). In this new economy (as in an earlier variant
in the US in the 1920s, preceding the world's greatest slump in 1929), 'it
had become fashionable to assert that recessions were a thing of the past'
(S. B. Wadhwani, Bank of England Quarterly Bulletin, Summer 2001,
p.234) . In the same article, however, one positive feature of these technical
innovations seems to have emerged, namely the ability of the US (and to a
lesser degree other countries) to operate with higher levels of
employment without triggering higher inflation, so helping the other
factors which have dramatically reduced price levels over much of the
world in recent times.
The end of inflation?
Well over 90 per cent of the world's current population have spent all
their lives in an age of inflation, open or suppressed, unprecedented in
degree, extent and duration. For millions of people, hyper-inflation has
been the norm rather than the exception; and they, including many in
the advanced countries, have had to learn to live with price rises which
previously would have been considered impossible in peace time and
barely tolerable at any time. Even countries which have been among the
most successful in fighting inflation, like Switzerland, West Germany
and the Netherlands, have experienced rates which in the previous
century would have been a cause for concern rather than congratu-
lation. For most of the last fifty years, falling price levels - as distinct
from reductions in the rate of inflation - have been as rare as snowballs
in the Sahara, as the comprehensive International Financial Statistics
published by the IMF and covering some 157 countries convincingly
prove. Figures from forty countries' recent experience of inflation are
given in the tables above (pp.670— 1), the first set comprising those
generally suffering hyper-inflation, while the second group contains by
contrast a number of those which have been among the most successful
in controlling inflation. Both sets of statistics throw up a few markers
giving grounds for optimism while still indicating how strongly
inflation had embedded itself into the foundations of the world's
economies and until recently has stubbornly persisted almost
everywhere, despite the ritual official protestations repeated loudly
every year that the reduction, if not the eradication, of inflation was
being given the highest priority. Political rhetoric and economic reality
have displayed their contrasting roles on a grand, global scale.
During the 1990s valiant attempts were made and pressed home more
strongly than before to control inflation. Table 13.4 includes seven
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FURTHER TOWARDS A GLOBAL CURRENCY
countries from Central and South America, notorious as the world's most
inflation-prone area. In 1993^1 Argentina and Brazil tied their currencies
to the US dollar and introduced a series of supporting measures to reduce
their external and internal deficits. In July 1994 Brazil's dollar-linking
arrangements were confirmed by the issue of a new currency, the cruzeiro
real, whereupon Brazil's inflation rate plunged from over 40 per cent per
month to around 1 Vi per cent. Similarly, in the year following reform in
Argentina the annual rate fell to 4.2 per cent. Nicaragua's spectacular
inflation, of over 3,700 per cent in 1991, fell to minus 1 in 1993 and
remained moderate at 10.9 per cent in 1994. Much greater back-sliding
was shown by Venezuela whose apparent success in 1993 was spoiled by a
return of over 100 per cent in 1994, being a pointer to the enormous
difficulties of turning temporary success into sustainable, low inflation in
countries inured to hyper-inflation.
The problem of Third World indebtedness, which had erupted into
the financial headlines after the Mexican crisis of 1982 (and which was,
with ominous optimism, pronounced by the World Bank as 'more or
less over by 1994') 17 was again highlighted in December 1994 by a
second Mexican crisis. However, the swiftly arranged credit of $50
billion by the United States and the IMF successfully prevented this
second Mexican crisis from leading to the threatened complete
breakdown of credit flows to the Third World, but has raised the
dangers of 'moral hazard' to international proportions. Among the
African countries shown in the table, Zaire's painful record stands out,
its ramshackle economy showing an inflation rate of well over 8,000 per
cent in 1994. The other three countries are rather typical of most of
Africa with rates averaging around 40 per cent. The four Asian
countries selected, with a total population of well over two billion,
show that they can live (and some even thrive) with rates averaging
around 20 per cent. Israel and Turkey are examples of relatively
advanced countries with very poor inflation records. The final group in
this table testify to the varied success experienced by former command
economies in their transition towards free markets. Poland and Estonia
show encouraging signs of progress but in contrast the Russian
Federation still suffers from the monetary debauchery which Lenin had
associated with capitalism.
With the partial exception of Greece, all the statistics for the twenty
countries in Table 13.5 show an encouragingly successful picture, led by
Japan, whose recent anti-inflation record betters that of the Netherlands,
Germany, Austria and Switzerland. Japan appears virtually to have
17 See the prophetic comments by R. Pringle in Kynaston, 1994: 146.
FURTHER TOWARDS A GLOBAL CURRENCY
681
conquered inflation. Among the positive factors behind this success are:
the strong yen, which kept import prices low; Japan's ability to produce
its way out of inflation; its high personal savings ratio and its similarly
high rate of investment. Certain negative factors also helped in deflating
the 'bubble economy' of the 1980s which had hugely inflated property
and equity prices. As the bubble burst so an increasing mountain of bad
debts held by the banks were reluctantly disclosed in the bank reports
from 1993 onwards. At first the concern was confined to the smaller
financial institutions such as the two Tokyo-based credit unions, Kyowa
Credit and Anzen Credit, which were baled out by the Ministry of
Finance and the central bank, the first rescue operation of this kind made
by the central bank since 1927. In October 1994 Nippon Trust Bank was
saved when taken over by Mitsubishi Bank. Sumitomo Bank, Japan's -
and the world's — largest bank, disclosed a post-tax loss for 1994, the first
such declared loss for the county's biggest banks for fifty years. Official
funds were extended to the Bank of Kobe, a large regional bank,
following the devastation of that region by the earthquake of 17 January
1995 (though the strength of the real economy has saved the country from
the massive deflationary effects which followed the Tokyo earthquake of
1923). The international standing and credit ratings of Japan's banks
were further adversely affected when news was belatedly and reluctantly
released concerning the activities in Daiwa Bank's branch in New York of
a certain Toshihide Iguchi. He had for a period of eleven years been
dealing fraudulently in US Bonds and Bills with accumulated losses,
skilfully hidden, of $1.1 billion - second only to that of Nick Leeson's
$1.4 billion. All the above factors contributed to reducing inflation and
inflationary expectations in Japan. Despite increasing bank failures
Japan's widely based economic strengths and its unique policy
combination of paternalism, rationalization and competition, were
believed to provide a firm foundation for its core banking system which
still boasted the six biggest, and eleven of the top twenty-five, banks in
the world ( The Banker, July, 1995). 18
Japan's ambivalent achievement in conquering inflation in recent
years was, as we have seen, outshone by Germany over a longer time
period. Germany also successfully absorbed its eastern provinces
without rekindling any substantial degree of inflation. It preserved the
prestige of the Deutschemark and supported the 'strong franc' policy of
France, though at some cost in higher rates of interest and of unemploy-
ment in those countries and elsewhere in Europe. It has thus drawn
18 This over-optimistic picture was replaced by a stubborn, deep-seated stagnation,
with monetary policy as yet impotent to overcome Japan's prolonged, deflationary
induced recession as described above (pp.594— 5).
682
FURTHER TOWARDS A GLOBAL CURRENCY
some (but still insufficient) attention to the problems of convergence
given the asymmetry in the business cycles of the fifteen members of the
European Union. The experience of the United States points to
inflationary pressures having been much less than expected, after ten
years of recovery, compared with earlier cycles. Denmark, Canada, New
Zealand, the UK - indeed almost all the twenty countries shown in the
table on p.671, have achieved during the last ten years or so rates of
inflation averaging barely half the average levels experienced in the
previous thirteen years from 1983 to 1992.
Furthermore, there is general agreement that the statistics have tended
to overstate actual inflation with regard to the relationship between
consumer price levels and the real standard of living. Two examples must
suffice. In September 1995 Germany's Federal Statistical Office
introduced a new cost-of-living index which showed that previous rates
were overstated by 0.3 per cent {Deutsche Bundesbank Monthly Bulletin,
September 1995, 59). More startling differences emerge from the USA,
where the Senate Finance Committee set up an investigation chaired by
Professor Michael Boskin of Stanford University. Their interim report,
Towards an Accurate Measure of the Cost of Living, published in
September 1995, concluded that in recent times the consumer price index
had overstated inflation by about 1.5 percentage points. Such matters are
not mere academic quibbles, particularly given the extent to which wage
rates and welfare payments are index-linked or used as basic reference
points in modern economies. Hence there has been a general move
towards policies of 'low' inflation rather than the appealingly simple but
misleading and excessively costly goal of zero inflation.
Associated with and in part responsible for the marked reduction in
inflation in recent years has been the greater degree of independence
granted in practice to a number of central banks and a general consensus
that they should concentrate single-mindedly on the supreme goal of
price stability. The means by which the monetary authorities strive to
achieve such stability must remain flexibly adapted to the differing social
demands and institutional patterns of the countries concerned. In
countries like Switzerland and Germany where long-term public support
for strict monetary policies has been evident, the policy of targeting some
measure of the money supply has proved itself to be effective. An
increasing number of other countries, where the social and economic
environment has been less supportive, have moved towards targeting
inflation more directly. New Zealand's lead in 1990 was followed by
Canada (1991), UK (1992), Sweden and Finland (1993) and Spain and
Mexico in 1993 (see p.654). In pursuing an inflation target the monetary
authorities are required to look at money in a very broad context (a
FURTHER TOWARDS A GLOBAL CURRENCY
683
salutary acceptance of one of the abiding lessons of history) - what
Andrew Haldane, of the Bank of England's Monetary Assessment and
Strategy Division, has dubbed a 'look at everything' approach (see his
excellent article on 'Inflation targets', BEQB, August 1995). One of the
key non-monetary assets rightfully given prominence is that for house
prices, which were a major causative factor in the inflationary surge of
the late 1980s but, acting in reverse, helped very significantly in the toning
down of Britain's inflation psychosis in the 1990s. The euphoria of equity
withdrawal was replaced by the harsh pain of negative equity as house
prices fell below mortgage obligations, particularly in London and the
south-east. Significantly, the pain caused by such falls in asset prices no
longer acts with its previous force to inhibit anti-inflation policies. The
folk-memory of deflation, debilitatingly present in the minds of those
occupying positions of power and influence in the three or four decades
after 1945, has now faded away, allowing more ruthless and effective
disinflationary policies to be adopted and sustained.
In theory and practice the monetary pendulum has obviously been
swinging widely in recent decades, but with the distinct promise of a
narrowing range, at least for most of the world's advanced economies, as
we arrived at the turn of the millennium. Consumer sovereignty can best
be exercised given a situation of reasonable price stability, where, in the
words of Alan Greenspan, Chairman of the Federal Reserve System,
'expected changes in the average price level are small enough and gradual
enough that they do not materially enter business and household
decisions'. However, the liberty conferred by stable money requires
eternal vigilance on the part of the monetary authorities, especially by the
Federal Reserve System, the Bank of Japan and the new European Central
Bank as they co-operate with the other 150 or so central bankers in
ridding the advanced countries of the scourge of inflation and in providing
a firm anchor to limit the slippage in the value of other currencies.
It is not only banks that need supervision, but also the growing
international host of electronic money issuers.19 Billions of fingers, at the
touch of a button in a borderless world, will keep the august monetary
authorities on their toes, as new definitions of money, of monetary
sovereignty and control will be dictated by the as yet unknown demands
of the electronic age. For the computer chip with its phenomenal memory
enables us practically to turn Blake's poetic vision into virtual reality:
To see a World in a Grain of Sand . . .
Hold Infinity in the palm of your hand
And Eternity in an hour.
19 See The Regulation of Electronic Money Issuers, Financial Services Authority,
London, December 2001.
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sector, some published for the best part of a century, provide an invaluable
source of information, especially for financial aspects of developments in the
twentieth century.
Official reports and publications
These are arranged chronologically from 1717. The place of publication,
except where otherwise indicated, is Great Britain.
1 Gold and Silver Coin: Report of Sir Isaac Newton to the House of
Commons, 1717.
2 Report on Public Credit, Alexander Hamilton, USA, 1790.
3 Report on a National Bank, Alexander Hamilton, USA, 1790.
4 Commercial Credit: Select Committee Report, 1793.
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7 Report of the House of Lords Committee on Promissory Notes under £5,
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8 Joint Stock Banks: Select Committee Report, 1837-8.
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10 Bank Act of 1844 . . . and the Causes of the Recent Commercial Distress:
Select Committee Report, 1857-8.
11 Report of the Treasury Committee into the Money Order System and the
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12 Royal Commission on the Relative Values of the Precious Metals: 1st, 2nd
and 3rd Reports, 1887-8.
13 Report on Indian Coinage and Exchanges (Herschell Report), 1893.
14 Report on Indian Coinage and Exchanges (Fowler Report), 1898.
15 National Monetary Commission Reports USA (N. W. Aldrich et al.),
1908-12.
16 Report of the Committee on Currency in British Colonial Africa (Emmott
Report), 1912.
17 Report on Money Trusts (Pujo Report), USA, 1913.
18 Royal Commission on Indian Currency and Finance (Chamberlain
Report), 1913.
19 Report of the Committee of the Treasury on Bank Amalgamations
(Colwyn Report, Cd 9052), 1918.
700
BIBLIOGRAPHY
20 Interim Report of the Committee on Currency and Foreign Exchanges
(Cunliffe, Cd 9182), 1918.
21 Final Report of the Committee on Currency and Foreign Exchanges
(Cunliffe, Cmd 464), 1919.
22 Report of the Committee of the Treasury on the Currency and Bank of
England Note Issues (Cmd 2393), 1925.
23 Report on National Debt and Taxation (Colwyn Report, Cmd 2800),
1927.
24 Report on Finance and Industry (Macmillan Report, Cmd 3897), 1931.
25 Report of the Royal Commission on the Geographical Distribution of the
Industrial Population (Barlow Report, Cmd 6153), 1940.
26 International Currency Experience: Lessons of the Interwar Period,
League of Nations, Geneva, 1944.
27 Report on Banking in Nigeria (Paton Report), 1948.
28 Banking Conditions in the Gold Coast and the Question of Setting up a
Central Bank (Trevor Report), 1952.
29 Enquiry Concerning Setting up a Central Bank in Nigeria (Fisher Report),
1953.
30 The Sterling Area: Bank for International Settlements, Basle, 1953.
31 Proposals for a Nigerian Central Bank (Loynes Report), 1957.
32 Report on the Financial Situation (Rueff Report), Paris, 1958.
33 First and Second Reports of the Council on Prices, Productivity and
Incomes, 1958.
34 Report on the Establishment of a Stock Exchange in Nigeria (Barback
Report), Lagos, 1959.
35 Third Report of the Council on Prices, Productivity and Incomes, 1959:
(see also Fourth Report, 1961).
36 Report on the Working of the Monetary System (Radcliffe Report, Cmnd
827), 1959.
37 Commission on Money and Credit: Their Influence on Jobs, Prices and
Incomes, New Jersey, 1961.
38 Commission on Money and Credit: Stabilisation Policies, New Jersey,
1963.
39 Report of the Committee of Enquiry into Decimal Currency (Halsbury
Report, Cmnd 2145), 1963.
40 Report on the Rate of Interest on Building Society Mortgages (Cmnd
3136), 1966.
41 Report on Bank Interest Rates (Cmnd 499), Belfast, 1966.
42 Report on Bank Charges (Cmnd 3292), 1967.
43 Capital Markets Study: Committee for Invisible Transactions {sic),
OECD, Paris, 1967.
44 The Basle Facility and the Sterling Area (Cmnd 3787), 1968.
45 Barclays Bank Ltd, Lloyds Bank Ltd, Martins Bank Ltd: A Report on the
Proposed Merger, Monopolies Commission, 1968.
46 First Report from the Select Committee on Nationalised Industries: Bank
of England, 1970.
BIBLIOGRAPHY
701
47 Report on the Realisation by Stages of European Economic and Monetary
Union (Werner Report), Luxembourg, 1970.
48 Report of the Committee on the Financial Facilities for Small Firms
(Economists' Advisory Group), 1971.
49 Report of the Committee of Inquiry on Small Firms (Bolton Report, Cmnd
4811), 1971.
50 Report of the Committee on Consumer Credit (Crowther Report, Cmnd
4596), 1971.
51 Competition and Credit Control, Bank of England, 1971.
52 Report of the Committee to Review National Savings (Page Report, Cmnd
5273), 1973.
53 Public Expenditure, Inflation and the Balance of Payments: Ninth Report
of the Expenditure Committee (HC 328), 1974.
54 The Attack on Inflation (Cmnd 6151), 1975.
55 The Licensing and Supervision of Deposit-Taking Institutions (Cmnd 6584) ,
1976.
56 Monetary Control (Cmnd 7858), 1980.
57 Report of the Committeee to Review the Functioning of Financial
Institutions (Wilson Report, Cmnd 7937), 1980.
58 Monetary Policy: Third Report from the Treasury and Civil Service
Committee (3 vols.), 1981.
59 Global '2000: United Nations, 1982.
60 The Hong Kong and Shanghai Banking Corporation, the Standard
Chartered Bank Ltd, the Royal Bank of Scotland Group Ltd: Report on the
Proposed Mergers, Monopolies and Mergers Commission, 1982.
61 The European Monetary System: Report of the Select Committee of the
House of Lords, 1983.
62 Report of the Committee to Consider the System of Banking Supervision
(Leigh-Pemberton Report, Cmnd 9550), 1985.
63 Report of the Committee on Economic and Monetary Union in the
European Community (Delors Report), Brussels, 1989.
64 Report of the Committee on Banking Services: Law and Practice (Jack
Report, Cm 622), 1989.
65 The European Financial Common Market: Report for the European
Parliament, Luxembourg, 1989.
66 Report of the House of Lords Select Committee on European Monetary
and Political Union (Aldington Report), 1990.
67 One Market, One Money. European Commission, Luxembourg, 1990.
68 Report of the Inquiry into the Supervision of the Bank of Credit and
Commerce International (Bingham Report), 1992.
69 The Cees Maas Report of the Expert Group on the Changeover to the
Single Currency, Luxembourg, 10 May 1995.
70 'One Currency for Europe: Green Paper on the Practical Arrangements for
the Introduction of the Single Currency', Luxembourg, 31 May 1995.
71 Report of the Board of Banking Supervision into the Circumstances of the
Collapse of Barings, HMSO, July 1995.
702
BIBLIOGRAPHY
72 Boskin, M. Report of the Senate Finance Committee 'Towards a More
Accurate Measure of the Cost of Living', Washington, 1996.
73 Monetary Policy in the Nordic Countries, Bank for International
Settlements, Basle, 1997.
74 HM Treasury: UK Membership of the Single Currency: an Assessment of
the Five Economic Tests, 1997.
75 Fifty years of the Deutsche Mark, Bundesbank, Oxford 1998.
76 HM Treasury: The New Monetary Policy Framework, 1999.
78 Competition in Banking, D. Cruickshank, HMSO, 2000.
79 European Central Bank: The Monetary Policy of the ECB, Frankfurt,
2001.
80 Responses to the Challenges of Globalisation, Commission of the
European Communities, Brussels, 2002.
Among the most useful of official periodical publications are the following:
Bank of England Quarterly Bulletins {BEQB); monthly reports of the Deutsche
Bundesbank; those of the various banks of the US Federal Reserve System and
the annual reports of the Bank for International Settlements. The International
Monetary Fund and World Bank provide an indispensable, authoritative and
exhaustive source of information, both quantitative and qualitative. In
addition, the European Commission publishes a stream of reports and reviews
on monetary and financial issues.
Illustrative of a number of books giving annotated collections and
summaries of official and unofficial reports and statistics are:
Capie, F. and Webber, A. (1984). Monetary Statistics of the UK, 1870-1983
(London).
Gregory, T. E. (1929). Select Statutes, Documents and Reports Relating to
British Banking, 1832-1928 (Cambridge).
Shaw, W. A. (1896). Select Tracts and Documents Illustrative of English
Monetary History, 1626-1730 (London).
Tawney, R. H. and Power, E. (1924). Tudor Economic Documents (London).
Thirsk, J. and Cooper, J. P. (1972). Seventeenth Century Economic
Documents (Oxford).
There are welcome signs that the relative scarcity of publications on monetary
history, to which attention was drawn in the Preface, is now being addressed
by the appearance of a number of recent books and journals. The wishful
statement by the overlooked Victorian economist, James Harvey, in his book
Paper Money (1877), seems at long last to be justified: 'Finance will be proved
to be the keystone of history and historians will be compelled to bring it more
prominently before students' (see Butchart, M., 1935, p. 131).
Index
Abbey National, building society and
bank, 430-1
accountancy systems: double-entry,
234-6; require monetary units, 15-16,
23, 27-9; require writing skills, 49-50
Act of Union (England/Scotland, 1707),
209, 275-6, 309
Aethelred II, king of England, 131-3
Africa, see Currency Boards; Nigeria
African Banking Corporation, 603-4
Agricultural Mortgage Corporation, 385
agriculture: agricultural banks, France,
559-62; influence on planning, Rome,
104; predominance, effects on
economy, 216—17
Alexander the Great, 80-7, 113
Alfred, king of Wessex, 128-30
Alliance and Leicester Building Society,
407
Allied Irish Banks, 676
aluminium, 45
amalgamation, 316-23, 329, 344, 353,
384-5, 413, 494, 501-2, 535-48, 571-3,
578-82, 587-9, 626-8
America: the following entries cover the
period up to the Civil War; entries for
later periods appear under United
States
America, banking and financial
institutions, 464—87; bank wars,
471-82; centre/periphery conflict,
464-6, 470-4; effects of South Sea
Bubble, 267, 464; failures, 486-7;
government-issued notes, 462-3; land
banks, 463^1; proposed National
Bank, 471-9; Revolution to Civil War,
466-79; State banks, 470-82; tax on
banks, 478-9; see also Bank of the
United States
America, economy and monetary
systems, 457-87; adoption of dollar,
469; bimetallism, 313, 469, 483;
colonial minting, 461; constitution,
468; counterfeit money, 485; early
paper money, 462—4; economic
growth, 480-90; factors leading to
revolution, 461-2; financing the British
war, 472; foreign coins as currency,
460-2, 468-70; government securities,
472, 474, 484; indigenous currencies,
459-60; inflation, 462-8, 474;
Louisiana Purchase, 347; mint, 469;
money supply, 457-66, 483-6; national
currency, 475; Revolution to Civil
War, 466-87; taxation, 462, 466
Amphipolis mint, 86
ancient moneys, see primitive and ancient
moneys
Anglo-African Bank, 603
Anglo-American Loan, 518
Anglo-Scots 'bank war', 322, 413
Anglo-Merovingian coinage, 119-21
Anglo-Saxonization of England, 117
annuities, 17th C, 264
704
INDEX
APACS, 672, 678
Argentina, 4, 634, 637, 640-1, 670, 680
Aristophanes and the quantity theory,
76-8,229
Aristotle, 17, 64, 229
asset management theory of banking, 421
assignats, 557—8
Athelstan, king of England, 130
Athenian coinage, 68-70; Attic standard,
74-7, 84-5
auditing, of banks, 425-31, 676-7
Augustus, emperor of Rome, 95-6
Aurelian, emperor of Rome, 98-100
Australia, 13; inflow of British capital,
351; gold discoveries, 484, 498
Austria, 359, 379, 576
Automatic Teller Machines (ATM), 544
Ayr Bank, 278-9
Aztecs, 177
Babylon/Mesopotamia, banking, 33,
48-52, 92
Bacon, Sir Francis, 222—3, 228
Bagehot, Walter, 344
Bahamas 'off-shore banking', 527-9
balance of trade theory, generally, 224—8
BancAmerica Corp, 545
Banco di Rialto, 234
Bank of Amsterdam, 234, 550-1
Bank of Barcelona, 234, 554
Bank of Bengal, 624
Bank of Bombay, 625
Bank of Canada, 39, 654
Bank of Ceylon, 622
Bank of Credit and Commerce
International, 430, 537, 651
Bank of Delft, 554
Bank Deutscher Lander, 578-9
Bank of England, 152, 239, 256-71,
303-23, 419-30; and Baring crisis, 349,
676; and discount houses, 340-3; and
EMS, 449; and gold supply, 19th C,
285; and South Sea Bubble, 265-70;
and Treasury, 310-14, 375-7, 394;
anti-bullionist position, 302, 312; bank
rate, 358-61, 374-5, 382, 394; between
the wars, 382-9; branches, 308, 363;
control/support of other institutions,
406-7, 421-31; gold reserves, 359-66;
issues silver coinage, 19th C, 295;
Minimum Lending Rate, 409;
nationalization, 375, 394; note-issuing
powers, 304, 308, 314-16, 375-8;
restriction on cash issue, 19th C, 300;
return to convertibility, 302-4
Bank of France, 555-60
Bank of Genoa, 234
Bank for International Settlements, 380,
445-6, 637, 671
Bank of Japan, 584-5, 589, 681, 683
Bank of London and South America, 360
Bank of Madras, 625
Bank of Malta, 621-2
Bank of Maryland, 471
Bank of Massachusetts, 471
Bank of Middelburg, 554
Bank of New York, 471
Bank of Prussia/Reichsbank, 568—75
bank rate, Britain, 310-11, 358-9, 362,
374-6, 382, 394-6
Bank of Scotland, 272-6, 322, 413, 630, 662
Bank of Sweden, 554
Bank of Taiwan, 587, 590
Bank of the United States, 269, 347;
branches, 474-6; crash (1841), 486
Bank of Wales, 413, 427
bankers' ramp, 383, 394
Bankers' Trust, 506-57
banking, generally, 34—5, 52-4, 153;
America/US, 269, 353, 362, 429, 461-3,
469-87, 488-94, 497-517, 523-16;
Babylon/Mesopotamia, 34, 48-52, 92;
Britain, 34, 233-83, 286-354, 369-73,
384-9, 408-31; Egypt, 51-4; financial
intermediaries, Crusades, 153-8;
France, 555-67; Germany, 567-82;
Greece, 70-3, 77-8; Holland, 549-55;
international controls, 428-31; Japan,
583-95; Rome, 78, 91-3; Russia, 555;
Scotland, 272-80, 309; Sweden, 554;
theories of 20th C. banking, 421; Third
World, 603-41; see also foreign
exchange
banknotes: accepted as real money, 304;
America/US, 462-6, 472-4, 490-5;
balance with gold, 284—6, see also gold
standard; Britain, 248, 370-84; China,
56-7, 180-4; exceed metallic money,
Britain, 279-80; France, 555-7; legal
tender status, Britain, 303, 309-10;
Persia, 183; small, Scotland, 277-8, 310;
value of paper pound, 300-4, 312-14
Barber, A., 409
Barclays Bank, 289, 321, 360, 384
Baring family, 345-7, 473, 484; Baring
crisis (1890), 349-50; (1995), 676
INDEX
705
barter, nature and origins, 9-22, black
economy and, 22; complexities of,
13-18; gift exchange/potlatch, 11—13;
modern barter and countertrading,
18-21; modern retail barter, 21-2
base-metal coinage: Anglo-Saxon, 122-3;
Celtic, 114; China, 55, 56; Rome, 87,
100; see also copper coinage, Britain
Basle Convergence Agreement, 430
Bauer, P. T., 619
Berliner Handelgesellschaft, 570
Biddle, N., 478-80
'Big Bang', 435, 620
bilateral trading, 19, 20-1
bills of exchange, 154-7, 340-5
bimetallism: America/US, 313, 469, 483,
494-9; ancient world, 62, 66-7, 83-6,
94, 95; Britain, 145-7, 170, 200,
210-12; Europe, 443, 492-3, 557, 661
Bingham Report (1992), 430
Birkbeck Bank, 332-3
Black Death, 160-4
Black Monday (1987), 436
Black Ox Bank, 289
Black Wednesday (1992), 455
Blondeau, P., 243
blood-money/bride-money, 25-6
Bodin, Jean, 231-2
Bolton Report, 406
Boskin, M., 671
Boulton, Matthew, 294-6
Brandt Report (1980), 8; new Brandt
Commission (1983), 44
Brazil, 4, 637, 670
Bretton Woods agreement (1944), 21,
446, 517-25
Briot, N., 242-3
Britain, banking and financial
institutions, 17th C. onwards, 30, 71,
238-83, 284-356, 406-31; beginnings
of, 235-7; between the wars, 382-90;
branch banking, 278, 290, 308, 320-3;
building societies, 261, 271, 323,
327-33, 345, 387-8, 407-12, 430-1;
capital market, 345-57; co-operative
banking, 325—7; country banking,
286-92, 297-8, 307, 321-2; credit
control/consumer protection, 407,
421-31; currency fs banking school,
311-14; definitions of money, late 20th
C, 404; discount houses, 340-5, 388-9,
390; effects of World War I, 369-72;
emergence of Big Five, 384;
Eurocurrency markets, 419; finance
houses, 408-9; foreign dominance,
154, 174, 233-7, 249, 345; friendly
societies, 271, 323-4; girobanking, 407;
goldsmith bankers, 237-40, 248-55;
growth in cheque use/deposit-taking,
317-20; impact on money supply,
293-5, 301-3; in Third World, 598,
600-12; increased competition,
408-20; influence of South Sea Bubble,
265-71; insurance companies/societies,
266, 271, 326-7, 410; joint-stock
banks, 304-22, 422, 423-6, 428;
LIBOR, 420; licensed deposit-takers,
425-6; limited liability, 319-21;
London Clearing House, 322-3;
merchant banking, 345-55; mergers,
316-23, 384-5; money market, 340-5,
357; overseas banks in Britain, 360-1,
410-20, 527; role in
industrial/economic development, 91,
296, 304, 316, 384-6; savings banks,
333-40, 410-13; Scotland, 272-80, 307,
316, 320-2, 413; secondary banking
crisis, 420-5; stock exchange, 271,
434-7; trade union banking, 323, 325;
working-class institutions, 323-39; see
also Bank of England
Britain, coinage, see under relevant
historical period; see also copper
coinage, Britain; gold coinage, Britain;
silver coinage, Britain
Britain, economy and monetary systems,
medieval, 113-75; Black
Death/Hundred Years' War, 160-5;
Canterbury, Sutton Hoo and Crondall,
118—22; coinage reform, under Henry
II, 139, 141-3; Danegeld/heregeld,
131—4; Dark Age, 117-18; dominance
of silver, 123; early Celtic coinage,
113-18; effects of Crusades, 153-9;
expansion of trade, 115, 119, 121,
133- 4, 153-4, 157; gold, 122, 143,
144-7; labour market, 162 — 4; money
supply, 125-31, 149-52, 160-5, 170;
national currency, 129—31, 170;
Norman Conquest/Domesday survey,
134- 9; poll taxes/Peasants' revolt,
167-8; pound sterling to 1272, 139-44;
price behaviour, 161-3; relationship
between monetary and fiscal policies,
147, 159, 169; sceat to silver penny,
123-8; taxation under Alfred, 128-9;
706
INDEX
touchstones/Trial of the Pyx, 144-7;
treasury/tally, 147-53; use of credit,
173-4; Vikings/Anglo-Saxon
recoinage, 128-31
Britain, economy and monetary systems,
Tudor/Stuart, 190-237; birth of British
banking, 233-7; bullionism, 223-33;
coin denominations and supply,
206-11; contract mints, 209;
dissolution of the monasteries, 194—7;
Great Debasement, 198-203; Henry
VII, 190—4; industrial development,
214-16; inflation and prices, 207-9,
212-18; inflow of bullion, 206-12;
inflow of foreign currencies, 188-94,
204—5; legalization of interest, 219-23;
new mints, 200; recoinage, after Henry
VIII, 203-12; taxation, 195, 197, 201,
210-11; union with Scotland, 209, 272,
274-6; usury, 218-23
Britain, economy and monetary systems,
17th/18th C, 238-83; banknotes, 248,
251-2, 261; Britannia coinage, 244;
development and mechanization of
coinage, 240-50; emphasis on gold,
248; government securities, 264-6, 271,
281; import duties, 244; market in
government debt, 249, 253, 258, 266;
money supply, 263, 279-83; recoinage
of silver, 245-8; Scotland, 272-9;
South Sea Bubble, 263-71; tallies/Stop
of the Exchequer, 252-5; taxation, 247,
257-8; war loan, 259-60; window tax,
247
Britain, economy and monetary systems,
19th C, 284-366; bank
development/constraints, 304-23;
banks' role in economic development,
292, 296, 303, 315; Companies Acts
(1844-79), 316-23; Crimean
War/Indian Mutiny, 342; gold
standard, 284-6, 304, 355-65, 495;
Great Depression, 354; impact of
French wars, 297-300; income tax, 299
industrial investment, lack of, 352-5;
industrial revolution, 284, 285-92;
influence of merchant bankers, 346,
350; limited liability, 291, 316-23;
money supply, 292-304; overseas
investment, 344-55; post-war
expansion/reflation policy, 306; return
to convertible currency, 303-4;
taxation, 299-300, 306; token coins,
289, 293-5; Treasury Bills, 344-5;
welfare state, birth of, 326-7; working
capital supply, 291-2; working-class
savings, 324-7
Britain, economy and monetary systems,
20th C, 367-456; attempts to return to
gold standard, 375-84; balance of
payments deficit, 433; Britain and
EMU, 443-56; changes of government,
383, 394, 396, 431; cheap money,
384-96; credit control/consumer
protection, 408, 421-31; credit gaps,
405—7; decimalization of currency
(1971), 444; devaluations of sterling,
395, 443, 523, 607-9; financial
'constitution', 425—31; financing
World War I, 368-75; floating pound,
447-50, 523; government securities,
368, 373-1, 386-8, 391-4; housing
booms, 387-8, 437-8; industrial
investment, 385-6, 405-6; inflation,
394, 396-120, 431-13, 670-1; money
supply, 399^104, 429-13;
nationalization, 394; overseas loans,
375, 383, 518; public-sector
investment, 386; regional policies,
387-8; removal of exchange controls,
449; rise of monetarism, 398, 431—13;
secondary banking crisis, 421-5; slump
(1990-3), 439; strikes, 381; taxation,
368, 370-4, 434; unemployment, 377,
378, 432-1; unionism, 400; welfare
state, 393, 401; World War II and
aftermath, 390-5
Britannia, introduction to British
currency, 244
British Bank of West Africa, 360-1, 604,
613
British Linen Company/Bank, 277
Brunner, Karl, 431
Bryan, William Jennings, 497-8, 503
budgets/budgeting: Britain, 20th C, 368,
372, 383, 437, 438; Domesday survey,
as enabling, 136; Rome, under
Diocletian, 102-5
building societies, Britain, 261, 271, 323,
327-33, 386-7, 407, 409-13, 430-1;
composite taxation, 333; failures,
330-2; incorporation as banks, 430-1
Bullion Report, 300-4
bullion supply: 16th C, 184-90, 210-16,
231-2; 19th C, 300-2, 359, 497; 20th
C.,374, 564
INDEX
707
bullionism, 223-33, 301-4
Bundesbank, 567, 578-82
Burke, Edmund, 286, 665
Butler, R. A., 396
Caisse des Comptes Courants, 557
Caisse d'Escompte de Commerce, 557
California goldfields, 483-4
Callaghan, James, 38, 431-2
Canada, 11-13, 39-40, 44, 448, 539,
607-8, 654
Canterbury, Sutton Hoo and Crondall
finds, 118-22
capital adequacy, 430
capital markets, 19th C. London, 345-55
cartwheel two-penny piece, 295
'cash', Chinese, 57
cashless society, 649-51, 667-8
cash ratio, 409
cattle as money, 42-5
Cayman Islands 'off-shore banking',
527-8
Cedar Holdings, 423
Cees Maas Report (1995), 673
Celtic coinage, 113-17
Central Bank of Nigeria, 610-16
certificates of deposit, 419-20
CHAPS, 672
Charing Cross Bank, 332
Charles I, king of England, 210—12;
extensive minting, 240-2
Charles II, king of England: mechanized
Britannia coinage, 244
Chartered Bank of India, Australia and
China, 360, 409, 629
Chaum, D., 673
Cheltenham & Gloucester Building
Society, 413
Chemical Bank, 415
cheques/checks, use of: Britain, 251-2,
317, 321, 672; France, 557; Italy, 252;
US, 485, 491
China: and American silver, 189-90;
invention of printing, 178
Chinese currencies, 36, 55-8; banknotes,
56-7, 179-84, 674; early coins/cash, 55,
56; metal cowries, 46, 56; metal tools, 56
Christianity: financial benefits to Roman
empire, 106; return to Britain, 118-19
cigarettes as currency, 19; see also
tobacco
Citibank (N.Y.) 420, 541; Citicorp 543,
545
City of Glasgow Bank, 320
Civil War, America (1861-5), 487-90
Civil War, England (1138-53), 140-2, 251
Clapham, Sir John, 258, 286, 302, 303
classical economic theory, 3, 382—3
clearing systems, 321—3, 482, 672
Clydesdale Bank, 322, 417
Cnut, king of Denmark, England and
Norway, 133^1
coinage, invention of, 34, 55-65; and
economic development, 57—65; China,
55, 56; cognizability, 47; India, 66;
Lydia and Ionian Greece, 61—6; milled,
243; politics and, 60-1; use of base
metals, 56; modern popularity of,
667-74
colonial banks, 603-7
Columbus, Christopher, 175-7, 186
Colwyn Report (1918), 385-7
Commerz Bank, 571, 577, 578
commodity dealing, and exchange rates,
448
Companies Acts (1844-79), 318-22
company shops, 293-4
Comptoir National, 414
Congdon, T., 443
Consols, 271
Constantine, emperor of Rome, 100,
106-8, 660
consumer sovereignty, 3, 451, 649-50,
683
contestable markets, 529-30
Continental banknotes, America, 464-7
Continental Illinois, 415, 429, 538
convertible currency: Africa, 603; Britain,
302-4; France, 564; Japan, 584; US,
494-9
Cook, Captain James, 38
co-operative banking: Britain, 324-6, 423;
Germany, 572-3
Copernicus, Nicholas, 231
copper coinage, Britain: cartwheel two-
penny piece, 295; Tudor/Stuart, 207,
209-10; under Charles II, 243^1
copper coinage, early, see base-metal
coinage
counterfeiting, effects on economy, 111,
139, 170-3
countertrading/modern barter, 18-23
country banking, Britain, 286-92, 296-8,
307, 320-2
country money, country pay, 459
cowries, 36-7; metal, 46, 56
708
INDEX
Craig, Sir John, 125, 192, 245, 248, 293
credit: and economic growth,
America/US, 478-9; and expansion of
trade, Tudor/Stuart Britain, 177,
220-2; consumer credit, Britain, 338—9,
408-13; consumer credit, US, 533—6;
credit gaps, 405-7, 627; France, 558,
567; Germany, 573; Japan, 585;
medieval times, 173-4; regulation,
Britain, 408, 421-31; regulation, US,
507, 512-16, 537-9
Credit Agricole, France, 561—2
Creditanstalt, 383, 576
Credit Foncier, 562
Credit Lyonnais, 412, 561, 566
Credit Mobilier, France, 560-1, 570
creditor forces, see pendulum theory
Crimean War, 342
Crocker National Bank, 529
Croesus, 62, 66-7, 85, 110
Crondall, Canterbury and Sutton Hoo
finds, 118-22
cross and crosslets coins, 142
Crowther Report (1971), 408
Crusades, effects on British economy,
153-9
Cunliffe Reports (1918-19), 375
Currency Boards: colonial Africa, 601-7
currency reforms, beneficial: Britain,
140-5, 191-A, 203-12, 245-8, 305;
France, 566; Germany, 567-71, 578;
impact on prices, 445; Japan, 584;
Rome, 88-98, 101, 106-7; US, 490-4
currency school banking school, 19th
C. Britain, 311-14
currency, single, 450-1, 652-3, 660-7
currency unions, Europe, 444, 567, 569,
660-7
CWS Bank, 324-6
da Gama, Vasco, 177
Daiwa Bank, 681
Dalton, Dr Hugh, 394-5
dandyprats, 191-2
Danegeld, 26, 131-A, 641; Danes, 40, 653
Darien Company, 273—6
Dark Ages, 117-18
da Vinci, Leonardo, 179—80
Deans, Thomas, 273
debasement of currency: and
development of quantity theory,
229-33; and economic development,
172-3, 201-3, 215-16; Anglo-Saxon,
122, 134; as hidden taxation, 199,
202-3; Athens, 76-8; Celtic, 116;
Egypt, under Rome, 90; Henry VIII,
171, 193^, 197-203; medieval Britain,
170—1; Merovingian, 121, 124; purity
testing, 144-7; Rome, 88-9, 95-9,
111-12, see also devaluation
debt, sovereign, see Third World
debtor forces, see pendulum theory
decimalization of currency, Britain, 444
Defoe, Daniel, 261
Delors, Jacques: Delors Report (1989),
450-5, 665
Delos, banking, 78—9
denier, 125
derivatives, 676
Deutsche Bank, 571, 577, 578
Deutsche Mark, 443, 444, 454, 567, 579,
581, 657, 682
devaluation of currency: effects on
international trade, 387-9; French
franc, 565; medieval Britain, 165, 171;
medieval Europe, 171—2; sterling, 20th
C, 395-6, 443, 523, 607; Tudor/Stuart
Britain, 198-203, 206, 208; US dollar,
20th C, 516, 523-4; see also
debasement
Development Bank of Singapore, 631
Diocletian, emperor of Rome, 96, 98-106;
Edict of Prices, 98, 101-3
Disconto-Gesellschaft, 570
discount houses, Britain, 340-5, 388-9,
390
disintermediation, 420
dollar: devaluations, 516, 523-4; dollar
area, 389; floating, 520; gold standard,
495-9, 516; 'greenbacks', 490-1, 496,
499; official adoption, 469; strength,
20th C, 395, 457-8; supply, post
World War II, 446, 519-21
Domesday survey, 136-9
double coincidence of wants, 15
double-entry bookkeeping, Italian,
introduction to Britain, 234-6
drachma, 75-7, 84, 665-6, 672
Dresdner Bank, 414, 571, 577, 578
'druid penny', 294
dual banking, USA, 490-3, 540
Duesenberry effect, 7
Duncan, Henry, 333-5
earthquake, at Aezani (1970), 102; at
Tokyo (1923), 587; at Kobe (1995), 681
INDEX
709
East India Company, 227-8, 237, 240, 265
ecclesiastical mints, Britain, 119, 123,
141, 200
ecological effects of cattle as money 42-4
economics, briefly defined, 34
economies, 'primitive' versus 'modern',
58-61, 68-71
Economist, launch of, 315
Ecu, 28, 445-7, 449, 452-3, 580; 'hard',
451-2, 673-1
ecu de marc, 653
Edgar, king of England, 130-1
Edge Act Corporations, 526, 540
Edict of Prices (Diocletian), 98, 100-3
Edward I, king of England: currency
reforms, 144—5
Edward III, king of England; labour
policy, 163
Egyptian currencies: grain banking, 52-5;
under Rome, 90
electronic money transfer, 649, 683
electrum, 62-3
Elizabeth I, queen of England: currency
reforms, 204-8
Elizabeth II, 700th Trial of the Pyx, 146-7
environmental issues, 657-8
Ephesus, 64
equilibrium, 29, 32, 448, 655-9
equity, negative, 672; withdrawal, 438
Erhard, Ludwig, 579
'Euro', 16, 454, 658, 660-7
Eurodollar, 419-20, 429
Eurocurrency markets, London, 419
Europe, generally: bimetallism, 494-9;
currency reforms, 20th C, 443-7;
currency unions, 445, 567—9, 660—1;
dominance of coinage, 169; Japanese
banks in, 416; monetary/banking
development, 549-82; national
currencies, 130, 171, 452, 567-9;
reconstruction, post World War I,
377-88; reconstruction, post World
War II, 517-25; US banks in, 529
European [Economic] Community,
banking and financial institutions:
central banks, 449-52, 454, 581-2, 652,
660-7
European Investment Bank, 447;
Exchange Rate Mechanism, 443,
448-50, 454-5,581
European [Economic] Community,
economy and monetary systems:
European Accounting Unit, 446-7;
European Currency Unit (Ecu), 447,
456, 580-2; European Economic and
Monetary Union, 443—56; European
Monetary System, 449-56, 567; 'hard'
Ecu, 452—3; single currency, 130, 449,
450-3, 454, 567, 649-50, 650-1, 660-7
European Recovery Programme, 446
European System of Central Banks, 451,
650, 653, 654, 664-7
Exchange and Mart, 22-3
Exchange Control Act (1947), 394
Exchange Rate Mechanism, 443, 449-50,
455, 581
Exchequer, generally, see Treasury;
Exchequer orders, 17th C, 252-4; Stop
of the Exchequer, 254—5
Export Credits Guarantee Dept, 405
Export-Import Bank (Japan), 590
farthing, medieval, 143—1
Federal Deposit Insurance Corporation,
515
Federal Funds market, US, 517
Federal Reserve System, US, 436, 503,
503-11; and Wall Street crash, 509-12;
dominance of New York, 505
Felicissimus, 99
Fijian currencies, 37—9
Finance Corporation for Industry, 405
finance houses, Britain, 408
financial deepening, Third World,
616-32; Shaw-McKinnon thesis,
619-22, 655
Financial Inter-Relations Ratio, 593
Financial Services Act I (1986), 430
Financial Services Authority, 430
Fitznigel family, 149
florin, 145, 550, 660
foreign bankers/financiers in Britain:
decline of influence, 233-7; medieval
times, 153, 165, 174; merchant
bankers, 19th C, 345
foreign exchange: as hidden usury,
219—22; as monetary indicator, 301—3,
311, 448; Bank of Amsterdam, 550;
Britain removes controls (1979), 448;
bullionism and, 223; development into
inland bills, 250-2; effects of
commodity dealing, 448; exchange
rates, generally, 107; India, 622;
international bills on London, 340,
343-7; Japan, 587, 588; medieval
times, 153-7, 172-4; 1930s, 389, 563;
710
INDEX
on full gold standard, 356-8; post
World War I, 375-6, 380-1; post
World War II, 395-6, 444-50, 451-6,
517-18, 521-2, 666; prices and, 447;
Tudor/Stuart times, 201, 233-6; see
also Exchange Rate Mechanism;
International Monetary Fund
France, monetary/banking development,
555-67; availability of credit, 559, 566;
bank failures, 557; Bank of France,
555-8; bank rate, 560; Banque Royale,
556; coin circulation, 559;
commercial/industrial/agricultural
banking and development, 558-61;
currency reform, 565—7; deregulation,
565; devaluations, 564-5; franc area,
389; girobanking, 563, 572; gold
standard/reserves, 564; income tax,
563; inflation, 555-8, 563^4; local
banks/branching, 558; Mississippi
Bubble, 265-70, 556-7; national debt,
563-4; nationalization of banks,
565-6; paper money, 555-7
Frankfurt, 348, 456, 578, 582, 665
Franklin, Benjamin, 463-4
Franklin National, 429, 538
'free banking', US, 491; Scotland, 277
Friedman, Milton, 3, 5, 32, 229, 402, 431,
436, 449, 497, 510, 515, 579
friendly societies, Britain, 271, 323—5
Fryer's Bank, 287-8
Galbraith, J. K., 460, 505, 509-11, 515-16
Gallienus, emperor of Rome, 98
General Agreement on Tariffs and Trade
(GATT),21,518
George I, king of England, 265—6
Germany, monetary/banking
development, 505, 567-82; assistance
to, post World War II, 520-1, 578;
availability of credit, 573; bank
failures, 383, 574-7; branching, 578,
580-1; Bundesbank, 567, 578-82;
currency reform, 445, 568-9, 578;
general strike, 575; girobanking, 580;
gold standard/reserves, 576; inflation,
378, 572-6, 570-82; joint-stock banks,
570-2; mergers, 572, 577, 578-81; post-
reunification, 454, 579; private banks,
568; reform/regulation, 578-80;
regional banking, 578; Reichsbank,
568, 570, 576; Rentenmark, 576;
reparations, post World War I, 378-9,
563, 575-6; state/agricultural banks,
568; taxation, 575; unemployment,
575, 577, 581; universal/industrial
banks, and economic development,
567-74; Zollverein, 568
Gerschenkron thesis, 573
Gibbon, Edward, 99
Giffen goods, e.g. coins, 669
gift exchange, 11-13
Gilbart,J. W.,312
Gilmour, Sir Ian, 437, 441, 454
girobanking: Britain, 407; Egypt, 52—5;
European comparisons, 563; France,
563; Germany, 580; Japan, 586
Gladstone, William, 337-8
Global 2000 Report (1982), 7, 44
gold coinage, Britain: Anglo-Saxon, 123;
ceases circulation (1914), 372; guinea,
243; penny/florin/noble, 145;
sovereign, 144, 192, 304; Tudor/Stuart
denominations, 207—9
gold/silver relationship, see bimetallism
gold standard: ascendancy, 355-66, 365;
attempts to return to, post World War
I, 375-84, 508, 510; Britain, 248, 284,
285-6, 304, 356-65, 495; France,
564—5; Germany, 576; India, 623-6;
international, 356-66, 574, 607; Japan,
582-6; US, 495-9, 516
goldsmith bankers, Britain, 238-9,
248-52, 255-7
Goldsmiths' Company, London, 146-7
Goodhart's Law, 440
government debt, see
national/government debt
grain: as currency, 50; banking, Egypt,
52-5
Graeco-Roman monetary expansion,
109-12
Greece, banking: concurrent with
coinage, 71-4; Delos, 78-9; Greek
bankers in Egypt, 52-3
Greece, currencies and monetary systems,
62-5, 66-87; Attic money standard,
74—8, 85—7; coins found in Britain, 81;
Laurion/Athenian, 68-71;
Lydian/Ionian coinage, 61-5;
Macedonia, 79-81; pre-coinage, 45;
widening use of coins, 66-8
Greece, economy, 58-61; development in
tandem with coinage, 68-70; Graeco-
Roman monetary expansion, 109-12;
impact of military and political
INDEX
711
activity, 79-87; in eurozone (1 January
2001), 663
'greenbacks', 490-6
Greenspan, A., 436, 539, 683
Gresham, Sir Thomas, 203-6, 233;
Gresham's Law, 37, 77-8, 172, 205,
212, 229, 646
groat, 144
guinea, gold, 243
Gurney family, 287, 289, 290
Gutenberg, Johann, 178-9
halfpenny, medieval, 129-30, 140, 144-5
Halifax Building society, 329, 431
hallmarking, 146
Halsbury Report, 444
Hamburg Girobank, 554
Hamilton, Alexander, 468-74
Hammurabi, 49—51
Hang Seng Bank, 630
Harvey, J., 702
Hayek, F., 3, 650, 653
Henry II, king of England, 141—3:
financial activity during Crusades,
156-7; Henricus coins, 142
Henry III, king of England, 159
Henry VII, king of England:
improvement of currency, 190-4
Henry VIII, king of England: debasement
of currency, 172, 194-7, 199-204;
dissolution of the monasteries, 194-7
heregeld, 133
Herfindahl-Hirschman Index, 548
Herstatt, I. D., Bank, 429
Heseltine, M., 454
Hien Tsung, emperor of China, 181
hire-purchase: consumer, 401, 407—9; for
industrial/agricultural expansion, 385
Hitler, Adolf, 576, 577
hoarding: Britannia coinage, 244; India,
623; medieval Britain, 117-22;
Scandinavia, 133-4; wartime, 165
Hoare's Bank, 252, 255, 261, 316
Hobbes, Thomas, 8
Hodge, Sir Julian, 409, 413
Hokkaido Colonial Bank, 586
Holland, monetary/banking
development, 17th C, 549-53; tulip
mania, 551-3, 675
Hong Kong, currency and banking,
628-31
Hong Kong and Shanghai Bank, 360, 629
Hoover, President Herbert C, 512, 577
housing booms: Britain, 386-7, 437-9;
US, 513
Howe, Sir Geoffrey, 147, 431, 437
Hugo, Victor, 662
Humphrey-Hawkins Act (1978), 533
Hundred Years' War, 164-6
Huskisson, William, 301, 306-7
ICFC or '3i's', 405, 447
Iguchi, Toshihide, 681
Imperial Bank, 627
import duties/tariff: Britain, 244, 298,
373; Japan, 593; US, 488
Incas, 177
income tax: Britain, 299-301, 372;
France, 563; Germany, 576; US, 487,
488
income policies: Edward III, 163; Rome,
under Diocletian, 101-4; UK 400-1
India, banking/monetary systems, 622-8;
financial deepening, 622—6; gold
standard/reserves, 624-6; introduction
of coinage, 66; moneylenders, 623-8
Indian Mutiny, 342
industrial and economic development,
America/US: California goldfields,
483-5; effects of South Sea Bubble,
265, 464; effects of World War II,
517—19; employment/productivity
objectives, 533; money supply and,
485-7; New Deal, 513; overseas
investment, 353, 486; paper money
and, 463; post Civil War, 489; pre Civil
War, 479-81; supports the dollar, 457
industrial and economic development,
Britain: banks' role in promoting, 292,
296, 304, 316, 385-6; effects of South
Sea Bubble, 266, 267-70; industrial
revolution, 284, 286-92; investment,
20th C, 384-5; lack of investment,
19th C, 351-5; SMEs, 381, 405-7;
Scotland, 279; Tudor/Stuart times,
214-17, 236
industrial decline, Britain, 345, 432;
influence of bias to London, 363;
influence of bias towards overseas
investment, 352-5, 362; influence of
monetarism, 436; influence of tax
regime, 333
inflation: America/US, 461-8, 476, 488-9,
530-2, 534—5; American silver and,
188-90; Britain, 207-8, 212-18; 393,
397, 398-420, 430-43; counterfeiting
712
INDEX
and, 112; ESCB and, 654; economic
development and, 644-7; effect on land
values, 106; establishes conditions for
barter, 19-21; France, 555-7, 563-5;
future of, 653-5; Germany, 379, 574-6,
580-1; hire-purchase and, 407-9;
house-purchase and, 437-9; influence
on economic theory, 3, 212-15, 654;
Japan, 590; Keynesianism and,
396-402; monetarism and, 396-400,
431-43; national debt/high taxation
hold down, 300; population growth
and, 215-17; printing and, 178, 181^;
recent, 667-72; Rome, 94-106, 107,
110-12; Third World, 636-41;
unionism and, 398; wars and, 155, 300,
643-5; end of, 679-83; see also prices
ING Bank 676
Institute of Bankers, 251, 361, 613
insurance companies/societies, Britain,
267, 271, 323-7, 410
interest payments, development of,
219-23; see also usury
interest rates, Britain: affect note issue,
305; bank rate, 309-11, 357-62, 376,
382, 395; between the wars, 385,
386-9; late 20th C., 432, 434, 436-7;
19th C., 306-7, 309; savings banks,
333, 335-9, 412; 17th/18th C., 223, 253,
257, 264, 271, 281; World War I loans,
371-4; World War II, 390-3
International Bank for Reconstruction
and Development, 518-19
international gold standard, 355-65, 574,
607
International Monetary Fund, 395, 432,
457, 518-25; and Third World, 520-3,
633-4; Special Drawing Rights, 521—2
invisible hand creates money, 281-2
Ireland: currency difficulties, 198, 247-8;
Irish coins as substitute for English,
198
Islamic banking, Third World, 600
Jackson, President Andrew, 269, 478-9,
525
James I and VI, king of England and
Scotland, 209, 272
Japan, monetary/banking development,
19th/20th C, 582-95; and Korean
War, 590; assistance to, post World
War II, 521, 590; Bank of Japan,
583-6; bank support for industry,
582-4, 590-3; branching, 589;
convertibility, 586; currency reform,
584; economic effects of World War II,
589; emphasis on military
development, 586, 588; exchange rates,
588, 590; expansion, 583—5; export
trade, 585-6, 590-3; girobanking, 586;
gold standard/reserves, 584, 588, 592;
group networking, 590-1; import
tariffs/barriers, 593; regulation/reform,
584, 586-7, 588-9; rise to
financial/economic supremacy, 590-3;
savings banks, 585; special banks,
585-6, 590; Third World aid, 592;
westernization, 583-6; Zaibatsu
banks, 583-5, 587-90; recent
problems, 594-5
Japan Development Bank, 590
Jay, P., 432
Jefferson, President Thomas, 468-9
Jevons, W. S., 13-14, 22, 47-8
Joachimsthal, 461
Johnson Matthey Bankers, 427, 537;
failure (1984), 427
joint-stock companies, 178, 236-7, 265-7;
Bank of England, 258-61; banks,
304—23; discount companies, 342;
limited liability, 316-23
Jones, Jack, 400
Joplin, T., 310
Julian Hodge Bank, 413
Julian S. Hodge & Co. Ltd, 409
Julius Caesar, emperor of Rome, 109-10
Kao Tsung, emperor of China, 182
keiretsu, 591
Keynes, John Maynard, 49, 369-70,
378-81, 391-3, 422, 518-21; and India,
626; Keynesian economic theory, 3-4,
32, 213-14, 378, 382-3, 391, 393-402,
465, 514, 516, 533, 602, 621, 655-7;
Keynesian ratchets, 399-402, 647-8,
650; 'Keynesian view' on investment,
350, 675
Knickerbocker Trust, 502
Knights Templar/Hospitallers, 153-7
Kohl, Helmut, 454, 456, 580, 657
Korean War, 396, 532, 590
Kublai Khan, Mongol emperor, 182
Lamfalussy, A., 450, 456
land banking: America/US, 463-4;
Britain, 261, 278-9
INDEX
713
Latin Monetary Union, 445, 495, 563, 663
Laurion silver, 68, 70-1
Law and Co. (Banque Generale), 554
Law, John, 265, 272, 279, 555-8, 647
Lawson, Nigel, 431, 437, 438, 443, 452
lazy coins, 678
leading currencies, 16: Attic standard,
74-8, 86; solidus of Constantine, 106-8;
see also Deutschemark; dollar; sterling
leading indicator, money supply as, 432
League of Nations, 379
lease-lend, 393
Leeson, N., 676
Leigh-Pemberton, R., 427
Lenin, 656
Leonardo da Vinci, 174, 178-9
less-developed countries (LDCs), see
Third World
Leyhaus Bank, 568
liability management theory of banking,
421-3
liberalization of financial systems
(Shaw-McKinnon thesis), 619-22
Liberator Building Society, failure, 330-1
licensed deposit-takers, Britain 425-6
'lifeboat' support for secondary banks,
424
limited liability, Britain: joint-stock
banks, 319-21; joint-stock companies,
318-19, 360; merchant banks, 349-50
liquidity trap, 594
Llantrisant, Royal Mint, 38, 207
Lloyd George, David, 326-7, 369-70
Lloyds Bank, 289, 384, 413, 429
Locke, John, 246-7
Lombards, as financial innovators, 220
London Clearing House, 322-3, 672
London and County Securities Group,
423
London financial institutions/markets,
dominance, 249, 284, 322, 340-65,
355-7, 453; overseas banks in Britain,
360, 410, 414-20
London and General Bank, 331
London Inter-Bank Offer Rate (LIBOR),
420
Long-Term Capital Management, 676
lotteries, government, 17th O, 264-5
Louisianan Purchase, 347
Lydian/Ionian coinage, 61-5
Ml, M2, M3, M4, etc., 404, 439-43,
553-4
Maastricht Treaty (1992), 456, 652, 663
Macedonian money, 79—82
Macmillan Committee (1929), 378, 380-2;
Macmillan Gap, 355, 381, 405-6, 627
macro-economic effects of Roman
empire, 87-108
macro-economic functions of money, 28
Magna Carta (1215), 159
Major, John, 437, 456
Malestroit, M., 231
Malthus, Thomas, 6
Malynes, Gerard de, 227, 231-2
manilla currencies, 46—7
Manufacturers-Hanover Trust, 541
market theory, 26, 29-30; market
equilibrium equity, 213; market
size, and money, 17-18, 109-10
Marine-Midland Bank, 630
Marshall Aid, 395, 445, 446, 518, 578, 616
mechanization of coin production,
179-81, 241-4; milling, 242-3
Medium Term Financial Strategy, 432—5
Mercantile Bank, 629
mercantilism, 226-9
merchant banks, 19th C. London,
345-55; Baring crisis (1890), 348-50; of
1995, 676; investment in America, 475,
486; limited liability, 349-50
mergers, see amalgamation
Mesopotamia/Babylon, banking, 34,
48-52, 92
Mestrell, E., 242
metallic money, pre-coinage, 45-8
metic bankers, Greece, 71-4
Mexico: currencies, 48; debt crisis (1982),
634-6; (1994), 670, 680, 682
micro-economic functions of money, 27
Midas touch, 62-5, 645
Middle Ages, see Britain, economy and
monetary systems, medieval
Midland Bank, 289, 361, 384, 630
Minford, P., 443
Minimum Lending Rate, Britain, 409, 443
mint, USA at Pennsylvania, 469; see also
Royal Mint
Misselden, Edward, 227-8
Mississippi Bubble, 266-70, 279, 555-7
Mitsubishi Bank, 585
Mitterrand, F., 456
models of economic development, 58-61,
618-21
monasteries, dissolution under Henry
VIII, 194-7
714
INDEX
Mondex, 673
monetarism, early, 225; rise of, late 20th
C. Britain, 399, 431—43; Rational
Expectations Hypothesis, 432; socialist
origins, 431-2; targets, 439—12
monetary instability: and interest in
monetary theory, 229; and return to
barter, 18-19, 21; and use of
indigenous currency, 41-2
money, nature and origins, 1-33;
comparisons with barter, 9-23;
defined, 29; economic origins and
functions, 27—9; leading indicator, 434;
need for standards in complex trading,
15—17; non-economic factors in
development, 23-6; pendulum theory,
29-33, 635, 639-^2, 652-6; personal
attitudes to, 2-3; population
increase/decrease and, 5-8, 161-3;
religious/societal context, 1, 23—6,
36-8; role of the state, 25-6
money, redefined, 305-6, 402, 439-40
money market, 19th C. London, 340-5,
356
money supply, see pendulum theory; see
also under Individual countries/
periods
Montagu, Charles, 246-7, 258-9
mortgages: Britain, 306, 329, 331-3,
386-8, 438-9; Germany, 575; US, 513;
see also land banks
multi-state central banking, 652-4, 657
Mun family, 228
Miintzverein, 568
Napoleon I, III, 661-2
National Bank of Belgium, 584
National Bank of Chicago, 415, 420
National Bank of Nigeria, 614
National Bank of San Diego, 429, 538
National Bank of Scotland, 322
national banks, US, 490, 503
national currencies, Europe, 132, 173,
453-5, 569
National Giro, 407, 412-23
national/government debt, America/US:
post British war, 471-A; post Civil
War, 487-90; 20th C, 507, 532
national/government debt, 17th/18th C.
Britain: and South Sea Bubble, 263-71;
consolidated in Bank of England,
264—5; management of, 270-1; market
in, 250, 253, 259, 266
national/government debt, 19th C.
Britain: Bank Indemnity Act, 299;
impact of French wars, 298-9;
reduction, 306, 368-9
national/government debt, 20th C.
Britain: effects of inter-war cheap
money, 384-90; financing World War
I, 368-75; financing World War II,
390-1; PSBR, 433
national/government debt, see also Third
World
National Provincial Bank, 310, 321, 384
National Westminster Bank, 312, 384
neo-classical economic theory, 4
Nero, 90
Netherlands, see Holland
neutral banking theory, 421-2
New York financial institutions/ markets,
dominance, 505-6
Newton, Sir Isaac, 246-7, 461
New Zealand, 654
Nigeria, economic and financial
planning, 610-15; financial deepening,
615-24
Nigerian Penny Bank, 614
Nixon, R. M., President, 523
Nobel Prize in Economics, 675-6
noble, 145
Norman, Montagu, 371, 378-80, 384,
385, 386, 506, 508, 577
Norman Conquest, 134-9
North American Indians: potlatch,
11-13; wampum, 39-12, 459-60
North/South effects of monetarism, 4, 7,
636
North and South Wales Bank, 320
numismatics: ferocity of, 58; first
published work on, 110, 116, 183, 203,
208
Nuremburg, 180
Nwankwo, G. O., 36, 611-12, 615, 628
O'Brien, Sir Leslie, 415, 419
Oersted, H. C.,45
Offa, king of Mercia: Offa's silver penny,
124-8
offshore banking, 527-9
oil prices and OPEC, 597-8, 616, 635
Oresme, Nicole, 229-30
Organization for Economic Co-operation
and Development (OECD), 446
Orphans' Bank, 261
Otto the Goldsmith, 139-40
INDEX
715
overdraft, invention of, Scotland, 276-7
Overend and Gurney, failure, 342-3
Owen, Robert, 323, 325
'owls', 70, 76
Pacioli, L., 235
Page Report, 412-13
Paine, Thomas, 471
Palmer Rule, 312
paper money, see banknotes
parallel market, origin, 415
Paris mint, 242
Paterson, William, 258-9, 270, 273
pawnbroking, 51, 250
Peasants' Revolt (1381), 163, 167-8
Peel, Sir Robert, 315
Penda, king of West Mercia, 126
pendulum theory, 29-32, 448, 641, 652-6;
operation, America/US, 470;
operation, Britain, 364—5, 454; see also
quantity theory
Pennsylvania Land Bank, 463
penny, English: first appearance, 114,
118, 124; gold, under Henry III, 145;
silver, Offa's, 124-8; silver, persistence
of, 208
penny banks, 338-9
pepper, as money, 91, 185
Pepys, Samuel, 252—3
per capita income comparisons, 579, 592,
596-600
Pereire brothers, 560
Persian empire: and spread of coins,
66-7; finance contributes to
defeat, 79-87; preference for gold, 67
personal attitudes to money, 2-3
'pet' banks, US, see State banks
Petty, W., 239, 647
Philip of Macedon, 80-1, 87, 113-14
Phoenician traders, 46-7, 115
Pigou effect, 438
pine-tree shilling, 461
piracy and plunder, 186, 210-11
Pitt, William, financial/fiscal policies,
299-300
Pohl, K. O., 453, 580
Poincare, R., 564
Poland, debt crisis (1980), 636
poll taxes, 14th C, 167-8
Polo, Marco, 176, 182-3
population decrease, and money supply,
160-4
population increase: America/US, 484;
and inflation, 215-18 and money
supply, 5-8; Third World, 616-17
Post Office Savings Banks, Britain, 337-8,
412; Singapore, 631
postal orders, 339; as legal tender, 371
Postal Savings System, US, 503
potatoes, 189
potin coins, 116-17
potlatch, 11-13
Potosi silver mines, 189-90
pound sterling, see sterling
poverty, Third World, 596-600
power over money, 647—52
pre-metallic money, 34—6
prices: America/US, 494-6; and exchange
rates, 446; behaviour, medieval
England, 160-3; bullion, 19th C,
300-2; currency reform and, 445-6;
Germany, 574—6; impact on
employment, 232; oil, 596, 599, 616,
632—633; price revolution,
Tudor/Stuart Britain, 212—18; price
signalling, 619; Rome, under
Diocletian, 101-3; 20th C. Britain, 376,
384-7, 395-400, 434; see also inflation
primitive and ancient moneys, 23-7,
34-58; bride-money/blood-money,
25-6; cattle, 42-5;
ceremonial/ornamental functions, 24,
41; cowries, 36-7; early development,
23-7; Fijian currencies, 37-9; grain,
50-5; metal cowries, 46, 56; pre-
coinage metallic money, 45-8;
pre-metallic money, 34—5; primitive
money, defined, 23; tools, 57;
wampum, 39-42, 459-60
printing, invention of, 175—83; influence
on coin minting, 180
Private Sector Liquidity, 441
privatization: late 20th C. Britain, 437;
Third World, 524
Ptolemies' banking system, 52-5
public finance, as destroyer of states, 96-7
Pujo Report, 503
Purchasing Power Parity (PPP) theory,
448, 574
purity testing: Trial of the Pyx, 146-7
qualities of a good money, 47-8
quality/quantity pendulum, see pendulum
theory
quantity theory of money, 229-33, 370,
400-2, 431, 438, 446
716
INDEX
Quetzal, 27
Quiggin, A. H., 24
Radcliffe Report (1959), 314, 389, 401-7,
410, 414, 579
Raiffeisen, W., 572
railways, investment in, 318, 342-3, 561,
568
Rashid al Din, 183
ratchets, see under Keynes
Rational Expectations Hypothesis, 432
'Reaganomics', 4
Reichsbank, Germany, 566, 568, 574
religious context of money, 1, 23-7, 36—9;
the Church and usury, 153-8, 218-21
Rentenmark, Germany, 576
replacement/revisionist currency
recycling, 169-70
restoration currency recycling, 169-71
retail barter, modern times, 21-3
Ricardo, David, 311, 376, 444
Richard I, king of England, 158
Richardson, Sir Gordon, 659
Richelieu, Count, 243, 556
Rome, banking, 78, 91-3
Rome, currencies and monetary systems,
87-108; circulation outside empire, 90,
110- 12; coins as propaganda, 90—1;
coins found in Britain, 90, 120;
currency reforms, 89, 95, 98—9, 100,
106-8; debasements, 90, 96-100,
111- 12; development of coinage, 85-9;
linguistic influences of, 88; share
transactions, 93
Rome, economy: Augustus to Aurelian,
94-100; Constantine onwards, 106-12;
Diocletian, 100-6; Graeco-Roman
monetary expansion, 109—12; inflation,
96-106, 107, 112; taxation, 95-7, 103-6
Roosevelt, President Franklin D., 512—13
Rose, George, 324, 335
Rostow, W. W., 287, 602, 610
Rothschild family, 309, 347-9, 353, 486,
560-1
Rotterdam Bank, 554
Rottier brothers, 243
Royal Bank of Scotland, 276-8, 413, 431
Royal Exchange, foundation, 233
Royal Mint, 38, 207; and Tealby find,
142; contracts out copper coinage,
294—6; extension, under Elizabeth I,
206; finds copper coinage undignified,
209, 239, 244-5; location of, 146-7;
new mint (1810), 295; Trial of the Pyx,
146-7, 282; recent statistics, 665, 668
RTGS, 672-3
Rueff Report, 566
Salamis, 70
savings institutions: Britain, 333-9,
412-13; Europe, 334; Germany, 572-3;
Japan, 585; Scotland, 333-5, 338;
Singapore, 629; US, 429, 535-7
savings ratio, 408-12, 579
Scandinavia, 125, 128-9, 133^1, 554,
661-2, 665, 702
sceattas, 123^4
Schacht, Hjalmar, 506, 576, 577
Schaaffenhausen Bank, 568, 570
Schuman, R., 652, 665
Scotland, monetary/banking
development, 272-9, 307, 322; Ayr
Bank, failure, 278-9; Bank of Scotland,
239, 273-7; banknote issue, 277-8,
309, 316, 317; branch banking, 277;
City of Glasgow Bank, failure, 320;
currency, 272, 274-6; Darien
Company, 273-6; English branches,
322, 413; money supply, 279-80; origin
of the overdraft, 276-7; other banks,
278-9; Royal Bank of Scotland, 276-7;
savings banks, 333—6, 338; union with
England, 209, 272, 275-6, 309
Scott, Sir Walter, 309
Securities Exchange Commission, US,
435, 514
Serran-Schreiber, 527
share transactions, Rome, 93; USA, 'on
margin', 511
Shaw-McKinnon thesis, 619-22
Shay's Rebellion (1786), 468
shilling (testoon), as coin, 192
Ship Bank (Aberystwyth), 289
Ship Bank (Glasgow), 277
ship money, 194-5, 212
silver coinage, Britain: debasement under
Henry VIII, 198-203; Offa's penny,
124-8; predominates, 122, 208;
recoinage (1696), 245-8;
shortages/substitutes, 19th C, 295-8;
Tudor/Stuart denominations, 208-9
silver/gold relationship, see bimetallism
silver mines, Bohemia, 461; Laurion, 68-71;
Mount Pangaeus, 85; Potosi, 188-90;
Spain, 94; Tyrol, 180; USA, 496-7
silver movement, US, 496-9, 517
INDEX
717
Singapore, currency and banking, 628-9,
664-6
Single European Act (1987), 450
single currency, 110, 130, 445, 456, 658,
660-7
Sinking Fund, 270
slaves: role in Greek economy, 69-70;
trading, 265
small and medium-sized enterprises
(SMEs), investment funds for, 381,
405-7, 615-17, 627, 702
Smiles, Samuel, 327
Smith, Adam, 17, 232-3, 239, 279-80,
282,465,551,557, 602, 632
Smith, Sidney, 299-300
Smith's Bank, 287
Smithsonian Agreement (1971), 523
'snake', 447-8
societal context of money, 1, 23—6, 36—8
Societe Generale, Belgium, 560, 566
solidus (Constantine), 106-7
South Sea Bubble, 263-71; effects,
America, 265, 464; effects, Britain,
265-6, 267-70
Sotheby's, 667, 670
sovereign, gold, 144, 192, 304
sovereign debt, see Third World
Spanish silver, see bullion supply
Sparta, 2-3, 71
Special Drawing Rights, IMF, 521-2
speculation, and money supply, 509-10,
674-9
spice trade, 16th/17th C., 185, 550
Stability and Growth Pact, 664, 666
Standard Bank (of South Africa), 360-1,
409, 629
standardization of currencies, early:
Athelstan/Edgar, 130-1; Attic
standard, 74-8, 85-6; Augustan
standard, 95; Danelaw, 129
State banks, America/US, 470, 478,
479-82, 490-4
sterling: adaptation to Europe, 443-5;
devaluations, 20th C., 389, 395-6, 443,
523, 607; first pound coin, 192;
floating, 445-9, 524; gold standard,
247, 282-3, 284-6, 304, 355-66, 495,
508-12; IMF support (1970s), 432;
origin of term, 143-4;
reputation/prestige, 171-2, 284—366,
442; sterling area, 362, 389, 444, 601,
605-10; to 1272, 139-46; value of
paper pound, 300-4, 311-14
Stock Exchange/market, Britain, 271,
433-6; Big Bang (1986), 435, 620;
closure, outbreak of World War I, 371;
crash (1987), 434, 435-6
Stop of the Exchequer, 254-5
strikes, 20th C: Britain, 381; Germany,
575
Strong, Benjamin, 505-8, 510
Stuart Britain, see Britain, economy and
monetary systems, Tudor/Stuart
stycas, 124
Suffolk Clearing Scheme, USA, 478, 482
Sumitomo Bank, 585, 681; Copper, 676
Sutton Hoo, Crondall and Canterbury
finds, 118-22
Sweden, banking, 238, 431, 554
Swift, Jonathan, 248
Swiss Bank Corporation, 414
Sword Blade Bank, 263, 266, 268
sword blade currency, 46
symmetallism, 495
taboo, 1, 37
tallies, 147-53, 252-3, 262, 280, 365
TARGET, 673-4
taxation: America/US, 462, 466, 487-8; as
medium for law enforcement, 25—6;
barter as means of evading, 22;
composite taxation of building
societies, 333; Crusades, 157—8;
debasement as, 199, 203; France, 563;
Germany, 577; Hundred Years' War,
165-8; income tax, Britain, 299, 373;
medieval Britain, 129, 131-9, 147-68;
mortgage interest relief, 438; 19th C.
Britain, 299-300, 306; 'paying through
the nose', 40; payment by cowrie, 36;
poll taxes, 14th C. Britain, 167-8;
relationship with monetary policy,
147, 160, 169, 198; Rome, 95-6, 103-6,
107; 17th/18th C. Britain, 249, 257-9;
ship money, 211—12; Sinking Fund
concept, 270; tax farming, 250;
Tudor/Stuart Britain, 195, 197, 202,
211-12; 20th C. Britain, 369, 370-3,
434; window tax, 247
Tealby coins, 142
terrorist attack (2001), 594
testoon, see shilling
Thatcher, Margaret, monetary policies,
4,431-43
Third World, banking/monetary systems,
598-629; balances in London, 606-10;
718
INDEX
bank failures, 612-13; branching,
615-17, 624-8; central banking, 610-13,
621-2, 626; centralized planning, 602,
608-12; commercial banks, outward
expansion, 628—30; Currency Boards,
601-6; currency circulation, 601—4,
621-3, 625-6; defined, 596-7; early
banks, 601—4; expatriate banks, 613-14;
financial deepening, 619-32; free
markets/ liberalization, 601, 614—32;
impact of sterling area, 601, 604—10;
India, 623-7; indigenous banking,
610-15, 622-3, 627; Islamic banking,
602; mergers, 627; nationalization, 627;
Nigeria, 610-16, 613-18, 623;
regulation/reform, 612-13;
Singapore/Hong Kong, 628-31; stock
exchanges/money markets, 613, 620-1,
629-30; use of primitive moneys, 603
Third World, economies and debt, 4, 21,
596-639; aid, as prop to inefficiency,
618, 620; debt, and development,
632-9; GNPs and debt, 634, 637; GNPs
and growth, 596-9; encouraging local
investment, 614—18, 627, 630; impact
of oil-price rises, 635, 636; inflation,
639-41; international interest rates,
633; Japanese aid, 592; Mexican crisis,
635-7; overseas trade, 600-4, 623, 632;
Polish crisis, 636; political
independence, 601, 610-16;
privatizations, 524; reductions in aid,
636; Shaw-McKinnon thesis, 619—22;
twenty most-indebted nations, 634
Thomas Amendment (USA), 514
Thornton, Henry, 301, 364
three-farthing/three-halfpenny coins, 208
thrifts, US, 427, 535-6
thrymsa, 122
tobacco as currency, American colonies,
459-60; see also cigarettes
Tobin, J., and tax, 674-9
token coins: Celtic coins as, 117; 19th C.
Britain, 289, 293-4, 296-7
tontines, 264
touchstones, 144—6
trade, expansion: influence of bullion,
184-8; medieval Britain, 115, 119, 122,
131—4, 153-6; mercantilism and,
225-30; New World and the East,
176-8; Tudor/Stuart Britain, 194,
201-3, 218, 232; with Graeco-Roman
money, 109-10
trade unions, Britain: and inflation, 400;
banking, 323-5
Treasury, Britain: Bank of England and,
311, 315, 373, 377, 394; banknote
issues, World War I, 372, 376-7;
medieval, 147-53; Treasury Bills, 344,
369, 388-91; tests on EMU, 663;
'Treasury view' on investment, 350;
Walpole's role in strengthening, 270
Treasury Deposit Receipts, 392
Treasury, US, 481-2; as central banker,
501; note issues, 489-91
Trial of the Pyx, 146-7
truck/payment in goods, 293—4
trust companies/money trust, US, 501-2
Trustee Savings Banks, Britain, 334—7,
412-13
Tudor Britain, see Britain, economy and
monetary systems, Tudor/Stuart
tulip mania, 17th C. Holland, 551-3, 675
unemployment: Germany, 575, 577,
581—2; influence on economic theory,
3; 19th C. Britain, 362; Tudor/Stuart
Britain, 216; 20th C. Britain, 377, 378,
380, 432, 433; US, 513, 533-4
Union Bank of Scotland, 322
Union Bank of Switzerland, 429, 562
United Bank for Africa (formerly British
and French Bank), 613, 615
United Dominions Trust, 385, 425
United States, banking and financial
institutions, 268, 473-94, 499-517,
524-48; Accord (1951), 532-3;
balkanization, 545; bank failures, 362,
429, 501-2, 511-12, 535-8; Bankers
Trust, 506; branch banking, 504,
540-2, 543; central banking, 499-509;
centre/periphery conflict, 465-6,
492-4, 540; consumer lending, 534-5,
543; deposit insurance, 534-9;
deregulation, 524-35; discount rate,
532-3; dominance of New York,
505-6; end of bimetallism, 494-9;
expansion, 490-4, 502, 543-6; Federal
Funds market, 422; Federal Reserve
System, 436, 503, 504-17; 'free
banking', 491; housing finance, 513;
influence of English systems, 351;
interstate banking, 526, 540, 542-3;
lending, 494, 506, 510-11, 513-14,
535-8, 543; mergers, 539-42, 547-8;
national banks, 491, 504; new types of
INDEX
719
account, 535; offshore banking,
526-30; Postal Savings System, 503;
quasi-banking services, 540-1; reform,
490-4, 512-17; regulation, 492-1, 500,
503-6, 513-16, 526, 538-40; SEC, 435,
514; State banks, 491-4; thrifts, 427,
535-6; trust companies/money trust,
501-3; US banks overseas, 410,
414-20, 524-30; unit banking, 491,
494; "Wall Street, 435-6, 505, 509-11,
588; see also Bank of the United States
United States, economy and monetary
systems, 485-504, 512-17; balance of
trade deficit, 523; cheap money, 514,
517, 532; convertibility, 496-7, 499;
credit control, 508, 514-16, 538-9;
currency reform, 490-1; devaluations
of dollar, 514, 523-4; economic
growth, 490, 517, 578;
employment/productivity objectives,
533; external investment, 525—30;
external loans, 393, 490; financing the
Civil War, 487-90; financing World
War II, 513; gold reserves, 447, 496,
498, 504; gold standard, 495-9, 516;
government securities, 486, 488, 504,
507, 510; inflation, 487-90, 530-3;
inward investment, 527, 529; Marshall
Aid, 445, 446, 518, 578, 639; money
supply, 499-500, 502-4, 506-7,
513-15; New Deal, 513; silver
movement, 495-9, 516; taxation,
487-8, 490; temporary currency,
World War I, 504; unemployment,
513, 533; Wall Street crash and,
509-12; see also dollar: for entries up
to the Civil War see under America
usury: hidden, 152, 156-7, 220;
Tudor/Stuart Britain redefines, 218-23
Vansittart, Nicholas, 303
Veblen, T., 670
Venezuela, 637, 641
Venice, 172, 174, 234, 550
Vikings: Danegeld and heregeld, 131-4;
invasion, and Anglo-Saxon recoinage,
128-9
Wakamba, cattle currency, 43
Wales, 20th C. financial institutions, 409,
413; Cardiff as financial centre, 413
Wall Street, 505; 1929 crash, 435, 509,
553, 588; 1987 crash, 435-7, 509-12
Walpole, Robert, 270
Walters, Sir Alan, 443
wampum, 39-42, 459-60
wars, and inflation, 153, 299, 646-8
Watt, James, 295
weighted capital adequacy theory of
banking, 423, 425, 430
welfare state, Britain, 326-7, 367, 393,
400; in Greece and Rome, 96-8
Wellington, Duke of, 70, 310, 365
Werner Report (1970), 450
West Africa: manilla currencies, 46—7; see
also Currency Boards; Nigeria
Westdeutsche Landesbank, 429
Westminster Bank, 384
whales' teeth, 37-8
White, Harry Dexter, 518-19
William I, king of England, 135—9
William and Glyn's Bank, 413
Wilkinson, J., ironmaster and banker,
288
Wilson, President Woodrow, 503-4
Wilson Report, 412
window tax, 247
Woods Bank, 287
Wood's half-pence, 248
working-class financial institutions,
Britain, 323-33
World War I, 284, 356; effects on
Japanese economy, 586; financing of,
367—74; reconstruction of Europe,
378-80; US and, 504, 506
World War II and aftermath, 588-90;
assistance to Germany/Japan, 520,
589-90; Bretton Woods agreement, 21,
446, 516—25; effect on US economic
growth, 517-18; financing the war,
390-4, 513; reconstruction of Europe,
517
writing, economic reasons for
development, 49-50
Wycliffe, John, 164
xenophobia, and changes in bank
names/ownership, 525, 613
Xerxes, 70
Yap stones, 38-9
Yasuda Bank, 585
Yen 16, 584, 592
Yokohama Specie Bank (Bank of Tokyo),
586, 590
Yorkshire (Penny) Bank, 339, 417
720
INDEX
Zaibatsu banks, Japan, 582-3, 584—90 zappozats, 27
Zaire, 640 Zollverein, Germany, 445, 569
Zambia, 640
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